Who Can Qualify For Earned Income Credit – The Earned Income Tax Credit (EITC) is a refundable tax credit aimed at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority such as the Internal Revenue Service (IRS), and can even generate a refund, and credit amounts calculated earned income on the basis of income and number of children.
The value of the Earned Income Tax Credit (EITC) is a fixed percentage of a household’s earned income until the credit reaches its maximum amount. The EITC remains at its maximum value as household earned income continues to increase, until earnings reach a phase-out threshold, after which the credit drops by a fixed percentage for each additional dollar of income above the phase-out threshold. EITC is a fully refundable credit at the federal level; some, but not all, states with EITCs also reimburse their own provisions.
Who Can Qualify For Earned Income Credit
EITC rates and thresholds depend on the family’s filing status and the number of children. Under current law, families without children are entitled to a relatively small EITC, with a phase-in rate of 7.65 percent and a maximum credit of $503.
Earned Income Tax Credit Gets Increase
The EITC was enacted in 1975 as a temporary credit to help low-income workers with children. Congress made it permanent in 1978 and it has been expanded several times. The Protecting Americans from Tax Hikes (PATH) Act of 2015 made the latest expansion of the EITC permanent.
As the following Figure shows, the EITC has grown significantly since its inception, from $5.5 billion in 1975 in constant 2015 dollars to $68.5 billion in 2015. Its cost rose sharply in 1990, 1993, 2001, and 2009, years in which the Congress increased the program.
The main strengths of the Earned Income Tax Credit are that it is well targeted at low-income workers and promotes entry into the workforce. The Earned Income Tax Credit, on the other hand, is complicated, has a high error rate, discourages work above a certain income threshold, imposes a marriage penalty, and creates inequality between workers with and without children. The IRS estimates that 20-25%. Qualified Americans do not claim the EITC. In Indiana, it is estimated that 15% or more of qualified Hoosiers do not apply for the credit.
In 2009 over 24 million people received nearly $49 billion in Federal Earned Income Tax Credits nationwide. 493, 000 Indiana residents benefited from the federal EITC, with an average credit amount of $1, 991.
It’s Your Money! Earned Income Tax Credit Provides Extra Money To Working Families.
Half of families with children receive the EITC at some point. – Center on Budget and Policy Priorities
Earned Income Tax Credits (EITC) are federal and state tax credits designed to offset some of the tax burden on low- and moderate-income individuals and families. Indiana residents who qualify to claim EITC on a federal income tax return may also be eligible for a similar credit on a state income tax return. The amount of EITC depends on a recipient’s income, marital status, and number of children.
Research shows that families use the EITC to pay for necessities, repair homes, maintain vehicles needed to commute to work, and in some cases, obtain additional education or training to increase their employability and earning potential. – Center on Budget and Policy Priorities
Effective January 1, 2009, the Indiana General Assembly increased the state’s EITC from 6% to 9% of the federal credit. Therefore, the amount of the Indiana credit is equal to 9% of the amount of the federal credit that a person is entitled to receive and claim for the taxable year.
Department Of The Treasury
To qualify for the EITC, taxpayers must file a tax return, even if they are not required based on income, and meet ONE of the following income qualifications for 2009:
All taxpayers making less than $57,000 can visit IRS.gov and use the industry’s best tax preparation software for free. Users get the step-by-step help they need to prepare, complete and file federal tax returns online – at no cost. The program is made possible through a partnership between the IRS and the Free File Alliance – a group of tax software providers. The Earned Income Tax Credit (EITC) boosts the income of low-wage workers and offsets some of the taxes they pay, providing the opportunity for low-income families to move toward meaningful economic security. The federal EITC has kept millions of Americans out of poverty since it was enacted in the mid-1970s. Over the past few decades, the effectiveness of the EITC has increased as many states have enacted and expanded their own credits.
The EITC benefits low-income people of all races and ethnicities. It is especially beneficial in historically excluded Black and Hispanic communities where labor market discrimination, inequitable education systems and countless other inequities have driven a disproportionate share of people into low-wage jobs.
The effects of the EITC have been studied for decades, and research consistently shows that children whose families received the credit are more likely to graduate from high school, attend college and be employed as adults.
Earned Income Tax Credit Parameters, 1975 2000 (dollar Amounts…
In addition to boosting financial security for working families with children, the EITC also improves health outcomes and is associated with a reduction in the number of children born with low birth weights.
As our country continues to face economic uncertainty, proven and effective income supports like the EITC are more important than ever. Even during periods of economic growth, too many workers struggle with low and slow wages, while also feeling the pressure of rising food, housing, childcare and other basic household costs. To make matters worse, in 46 states low-income families pay a higher share of their income in state and local taxes than wealthier families.
This leaves working families with even fewer resources to make ends meet and contributes to ever-increasing income and wealth inequality. The creation or expansion of a state EITC can address this inequity in most state tax codes.
The federal EITC has been supplementing the incomes of low-wage workers since 1975. Lawmakers have enhanced the credit over time so that more working families can put food on the table, pay their bills and be in a better position to achieve meaningful economic stability.
Earned Income Tax Credit (eitc) Legislation Update
Last year, the American Rescue Plan Act temporarily expanded the federal EITC for low-wage workers without children at home and made it more widely available by expanding age and income limits. These critical extensions expired on January 1, 2022, although some members of Congress would like to revive those improvements.
The federal EITC delivered approximately $60 billion to 25 million working families and individuals in 2021, through claims on their 2020 tax returns.
Used primarily as a source of temporary support, the EITC helps millions of families each year. The expanded federal EITC, along with the enhanced federal Child Tax Credit (CTC), lifted an estimated 5.3 million people out of poverty in 2021.
The EITC is based on earned income such as salaries and wages. For example, for every dollar earned up to $15,410 in 2022, families with three or more children will receive a tax credit equal to 45 percent of that earnings, up to a maximum credit of $6,935. Because the credit is designed to increase income for low and moderate income workers, income limits restrict eligibility for the credit. Families continue to be eligible for the maximum credit until income reaches $20,140 for single family heads. Above this level, the value of the credit is gradually reduced to zero and is not available when household income exceeds the maximum eligibility level. Single-parent families with three or more children and earning $53,070 or more per year are ineligible, as are married couples earning $59,200 or more. In the absence of federal action to revive recent EITC enhancements, the credit will be much less generous and available to fewer workers without children at home: the maximum credit for such workers is $560, about a third of what was made available to this population as a. result in 2021 improvement.
Earned Income Tax Credit Applies To Some Who Might Not Realize It
In addition to helping working families pay for child care, health care, housing, food and other necessities, state EITCs help improve the equity of state and local tax systems upside down. Unlike federal taxes, state and local taxes are generally regressive, requiring low- and moderate-income households to pay a larger share of their income in taxes than wealthier taxpayers. The poorest 20 percent of Americans pay 11.4 percent of their income in state and local taxes. In contrast, middle-income taxpayers pay 9.9 percent and the richest 1 percent of taxpayers pay only 7.4 percent of their income in state and local taxes.
The heavy use of regressive sales and property taxes (paid by all working families) drives the high state and local tax rates faced by the poorest families. A refundable state EITC is one of the most effective and targeted tax reduction strategies to help offset these regressive taxes and is one of several policy options that states can use to add progressivity to their tax system.
Refundability is a critical component of state EITCs because it ensures that workers and their families receive the full benefit of the credit. Refundable credits do not depend on the amount of income taxes paid; rather,
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