Earned Income Tax Credits (EITC) What is the federal earned income tax credit? How many states offer a state income tax credit? How many states use TANF to fund their EITC? EITC Outreach Other EITC Resources
What is the federal earned income tax credit? The earned income tax credit (EITC) is a federal refundable tax credit. Families are eligible for the EITC if their income is at or below $37,263 and investment income is limited to $2,700 per year. The 2006 poverty guideline is $13,200 for a family of two, $16,600 for a family of three, and $20,000 for a family of four in the District of Columbia and 48 contiguous states (it is slightly higher in Alaska and Hawaii). The maximum credit in 2004 is $2,662 for families with one child, and $4,400 for families with more than one child. The federal EITC supplements wages of low-income families and complements welfare reform efforts. The tax credit helps lift families out of poverty and can be used as a tool to build assets. Figure 1. Value of EITC at Various Income Levels for Tax Year 2004 
Source: Center on Budget and Policy Priorities, 2004 Note: EITC benefits increase slightly for married couples in the phaseout range. How many states offer a state income tax credit? At least 19 states offer an income tax credit in addition to the federal EITC. The state credit is often a percentage of the federal credit (see Table 1). Table 1. State Income Tax Credit as Percentage of Federal EITC | State | % of Federal EITC | Refundable or Non-refundable | | Colorado | 10% | refundable | | Delaware | 20% | non-refundable | | District of Columbia | 35% | refundable | | Illinois | 5% | refundable | | Indiana | 6% | refundable | | Iowa | 6.5% | non-refundable | | Kansas | 15% | refundable | | Maine | 4.92% | non-refundable | | Maryland | 50% non-refundable, 20%
refundable | both | | Massachusetts | 15% | refundable | | Minnesota | 33%, on average | refundable | | Nebrasks | 8% | refundable | | New Jersey | 15% in 2001, 17.5% in 2002,
20% in 2003 and after if income
below $20,000 | refundable | | New York | 30% | refundable | | Oklahoma | 5% | refundable | | Oregon | 5% | refundable | | Rhode Island | 10% | refundable | | Vermont | 32% | refundable | | Virginia | 20% | non-refundable | | Wisconsin | 4% if 1 child, 14% if 2 children,
43% if 3 children or more | refundable | Sixteen states and the District of Columbia have refundable tax credits (see figure 2). A refundable tax credit permits families to receive the entire amount of the tax credit even if it exceeds their income tax liability. Colorado has a refundable income tax credit but it is suspended due to budget constraints. Three states have non-refundable tax credits (see figure 2). Nonrefundable tax credits reduce or eliminate a family's state taxes, but the family does not receive a refund greater than what they owe. Figure 2. State Earned Income Tax Credits
 | Fully refundable state income tax credit (16)
CO, IL, IN, KS, MA, MN, NE, NJ, NY, OK, OR, RI, VT, WI, DC |  | Both refundable and non refundable state income tax credit (1)
MD |  | Non-refundable state income tax credit (4)
DE, IA, ME, VA | Source: The Center on Budget and Policy Priorities, 2004. How many states use TANF to fund their EITC? Federal TANF regulations permit TANF money to be used to fund refundable tax credits. According to the Department of Health & Human Services' Administration for Children & Families TANF Financial Data report for 2003, 10 states use TANF to fund their state income tax credit programs. - 2 states (Minnesota and Wisconsin) use federal TANF funds to pay for their refundable state earned income tax credit.
- 5 states (Indiana, Kansas, Maryland, New York and Wisconsin) use state maintenance of effort (MOE) money designated to a separate state program for their refundable state earned income tax credit.
- 2 states (Massachusetts and Vermont) use state MOE money for their refundable state earned income tax credit.
- New Jersey uses both federal TANF and state MOE for their state refundable earned income tax credit.
For more information on state EITC go to http://www.stateeitc.org/ EITC Outreach Research indicates that up to 20% of eligible individuals and families do not claim the federal EITC. A recent study by the Annie E. Casey Foundation shows that increased marketing and free tax preparation services can double and sometimes quadruple the number of EITC-eligible tax returns over previous years. Many organizations are working on outreach campaigns to increase the number of eligible individuals and families claiming the EITC. A few examples include:
State Outreach Campaigns The Delaware EITC Campaign is coordinated through the Nehemiah Gateway Community Development Corporation. The Corporation coordinates with public, private and nonprofit organizations to promote EITC, offer free tax preparation and financial literacy, as well as provide free savings accounts to unbanked workers. The campaign also offers individual development accounts and other services. The group has consistently increased the number of returns filed, the percentage of EITC claims, and total dollars coming back to the community since it started in 2001. Florida has created a state-wide multi-partner EITC and broader "Prosperity Initiative." Workforce Florida, Inc. (WFI) and the Agency for Workforce Innovation (AWI) have developed an EITC/Prosperity Partners online resource located at: http://www.floridajobs.org/eitc/index.html. This web resource is updated weekly with new materials, press releases, information on EITC and Prosperity Campaigns in each county around the state.multi The governor’s office in Michigan spearheaded the Michigan EITC Outreach Initiative. The initiative includes multiple state agencies and local community organizations, to include the Department of Labor and Employment, the Michigan State Cooperative Extension, Michigan Community Action Agency Association, and the Michigan Association of CPAs. In 2003 the initiative increased EITC returns by $32 million. Several sites have become model programs. The IRS has adopted the Van Buren County rural coalition as a model for their Volunteer Income Tax Assistance Program (VITA). The federal Department of Human Services has chosen Benton Harbor as a model for three nationwide pilot sites targeting Temporary Assistance for Needy Families (TANF) clients. EITC Carolinas is a statewide network devoted to increasing awareness and utilization of the EITC. The partnership includes philanthropic representatives, government officials, and community-based organizations. Their goals center around education and awareness of the EITC, promoting free or low-cost tax preparation sites, and providing asset building opportunities for low-income workers. The network has a toll-free hotline for EITC information and a website. www.eitc-carolinas.org Other links on EITC outreach: Annie E. Casey Foundation: www.aecf.org/initiatives/fes/eitc.htm Center on Budget and Policy Priorities: http://www.cbpp.org/ Corporate Voices for Working Families: http://www.cvworkingfamilies.org/ National Community Tax Coalition http://www.tax-coalition.org/ United Way of America: http://national.unitedway.org/eitc/
Other EITC Resources: NCSL Links Poor Families Need to Know About Federal Tax Credit: March 2003 State Legislatures magazine article Human Services Committee position on EITC: Financial Policies That Reward Work: Earned Income Tax Credit and Individual Development Accounts (Joint policy with the Budget and Revenue Committee) Strengthening Families and Neighborhoods: This project is a partnership of the National Conference of State Legislatures and the Annie E. Casey Foundation EITC Information and Research Internal Revenue Service (IRS): www.irs.gov/individuals/index.html Center on Budget and Policy Priorities: http://www.cbpp.org/ Brookings Institution – Metropolitan Policy Program: http://www.brookings.edu/es/urban/eitc.htm
For more information on welfare reform issues, please contact Jack Tweedie in the Denver office at 303.364.7700 or cyf-info@ncsl.org or either Sheri Steisel or Lee Posey in the D.C. office at 202.624.5400 or fedhumserv-info@ncsl.org Back to Supporting Low-Income Families |