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Earned Income Tax Credits for Working Families

Tax Credits for Working Families: Earned Income Tax Credit

Qiana Torres Flores 7/31/2014

An earned income tax credit (EITC) is designed to help low-to-moderate-income working people get ahead. The federal tax credit was enacted in 1975 and made permanent in 1978. Twenty-five states and the District of Columbia also have earned income tax credits. This report describes the federal and state earned income tax credits, answers common questions about them and provides examples of how to help working people find and use free tax preparation services.

What Is the Federal Earned Income Tax Credit?

The federal EITC for low-to-moderate-income working people reduces the amount of taxes owed, and refunds the difference if the credit is larger than the amount owed. The credit changes every year and is based on earnings, number of qualifying children and marital status. A qualifying child is determined by age, the relationship to the filer, how long the filer and child have lived together in the U.S. and whether the child has filed a joint return.   

To claim the earned income tax credit, a tax return must be filed with the Internal Revenue Service (IRS) that includes proper documentation. Those without a qualifying child must be 25-65 years old at the end of the year, live in the United States for more than half the year, and cannot qualify as a dependent of another person.

The American Taxpayer Relief Act of 2013 extended the federal EITC for five years. The act also specified that EITC refunds will not count as income or resources for 12 months after receipt when applying for benefits or assistance under any federal program or state program financed entirely or partially with federal funds.

For tax year 2013, a worker with no children who makes less than $14,340 can receive up to $487. Single parents with three or more children who make less than $46,227 are eligible for $6,044. Married couples must file taxes jointly. Couples earning less than $19,680 qualify for a credit of $487. Those with three or more children qualify for $6,044 if they make less than $51,567. The IRS estimates that more than 27 million citizens received over $65 billion in federal, refundable credits in tax year 2013.

Table 1.

2013 Income Limits for the Federal EITC
for Single and Married Individuals

Children

Maximum
Credit

Maximum Earnings

Single

Married

Childless

$487

$14,340

$19,680

One Child

$3,250

$37,870

$43,210

Two Children

$5,372

$43,038

$48,378

Three or More Children

$6,044

$46,227

$51,567

Source: Internal Revenue Service, EITC Income Limits, Maximum Credit Amounts and Tax Law Updates (Washington, D.C: IRS, July 2014).

 

Table 2.

Federal Earned Income Tax Credit Filing Statistics by State for Tax Year 2013

State/Jurisdiction

Number of Recipients

Average EITC Amount

Total EITC Amount

Alabama

515,606

$2,732

$1,408,405,095

Alaska

48,570

$2,049

$99,535,501

Arizona

566,441

$2,530

$1,433,098,089

Arkansas

302,023

$2,552

$770,678,702

California

3,083,742

$2,373

$7,316,511,003

Colorado

357,542

$2,174

$777,322,658

Connecticut

220,646

$2,140

$472,260,547

Delaware

73,460

$2,309

$169,603,403

Florida

2,120,361

$2,450

$5,193,890,060

Georgia

1,095,487

$2,692

$2,949,111,455

Hawaii

110,046

$2,175

$239,352,799

Idaho

134,574

$2,283

$307,229,056

Illinois

1,019,137

$2,437

$2,483,142,982

Indiana

558,245

$2,346

$1,309,823,883

Iowa

211,604

$2,182

$461,687,885

Kansas

214,133

$2,307

$494,005,110

Kentucky

408,979

$2,351

$961,464,719

Louisiana

518,721

$2,741

$1,421,741,236

Maine

101,893

$2,035

$207,382,961

Maryland

417,308

$2,297

$958,418,710

Massachusetts

406,180

$2,050

$832,554,310

Michigan

822,950

$2,387

$1,964,479,848

Minnesota

344,383

$2,124

$731,511,772

Mississippi

390,009

$2,817

$1,098,764,350

Missouri

519,007

$2,377

$1,233,578,192

Montana

80,133

$2,096

$167,950,541

Nebraska

136,277

$2,271

$309,509,585

Nevada

244,076

$2,372

$579,035,441

New Hampshire

79,256

$1,926

$152,621,258

New Jersey

595,985

$2,281

$1,359,484,329

New Mexico

214,229

$2,405

$515,232,177

New York

1,769,693

$2,309

$4,086,337,391

North Carolina

931,301

$2,462

$2,292,629,438

North Dakota

42,563

$2,051

$87,297,986

Ohio

963,323

$2,364

$2,277,563,931

Oklahoma

336,806

$2,449

$824,944,495

Oregon

278,952

$2,101

$586,120,604

Pennsylvania

935,533

$2,185

$2,044,598,474

Rhode Island

84,091

$2,264

$190,416,658

South Carolina

494,309

$2,504

$1,237,886,708

South Dakota

66,014

$2,143

$141,458,965

Tennessee

656,704

$2,492

$1,636,522,292

Texas

2,634,896

$2,661

$7,010,824,337

Utah

195,032

$2,320

$452,462,891

Vermont

45,137

$1,894

$85,502,853

Virginia

613,791

$2,287

$1,403,818,552

Washington

447,613

$2,145

$960,348,149

West Virginia

157,670

$2,211

$348,603,988

Wisconsin

391,224

$2,167

$847,826,119

Wyoming

39,039

$2,038

$79,553,992

District of Columbia

53,941

$2,316

$124,901,139

Total

27,072,383

$2,407

$65,154,239,180

SourceInternal Revenue Service filing data report 701 as of July 31, 2014, (Washington, D.C.: IRS, July 2014 ).

What Are the State Earned Income Tax Credits?

Quick Facts: Earned Income Tax Credits

  • EITC is a tax benefit designed to help low- to-moderate-income, working people.

  • Workers must file tax returns to receive the credit.

  • The federal government, 25 states and the District of Columbia have credits.

  • More than 27 million citizens received almost $65 billion in federal, refundable credits in tax year 2013.

  • An estimated 20 percent of eligible workers do not claim EITC.

Twenty-five states and the District of Columbia have earned income tax credits. All states except Minnesota set their credits based on the federal credit; however, the percentages used vary greatly from state to state. Like the federal government, states require workers to file a proper tax return, and in 20 of the states and the District of Columbia, credits are fully refundable if the amount is greater than the taxes owed. In Delaware, Maine, Ohio and Virginia, the EITC can only reduce a worker's tax liability, not provide a refund. All of the states that offer credits, except Wisconsin, allow workers without qualifying children to be eligible for EITC.

Table 3.

State Earned Income Tax Credits,

Reflecting Legislative Enactments as of July 2014

State

Percentage of
Federal Credit

Refundable?

Coloradoa

10%
(currently suspended)

Yes

Connecticut

25

Yes

Delaware

20

No

Illinois

10

Yes

Indiana

9

Yes

Iowa

14

Yes

Kansas

17

Yes

Louisiana

3.5

Yes

Maine

5

No

Marylandb

25.5

Yes

50

No

Massachusetts

15

Yes

Michigan

6

Yes

Minnesotac

 

Based on income

Yes

Nebraska

10

Yes

New Jersey

20

Yes

New Mexico

10

Yes

New York

30

Yes

Ohio

10 percent, limited to 50 percent of liability for state taxable income above $20,000

No

Oklahoma

5

Yes

Oregon

8

Yes

Rhode Island

10

Yes

Vermont

32

Yes

Virginia

20

No

Washingtond         

10

Yes

Wisconsin

4 - one child
11 - two children
34 - three children

Yes

District of Columbia

40

Yes

Notes:

a—Implementation of the Colorado EITC is contingent upon state revenues reaching the level specified by the Taxpayer Bill of Rights Act.
b—Maryland offers a 25.5 percent refundable or a 50 percent non-refundable EITC. Taxpayers can chose to claim either, but not both.
c—Minnesota law sets the Working Families Credit based on income. The credit matches the phaseout to the federal earned income credit phaseout for tax years 2013 and following years. Read more here.
d—Washington enacted a refundable credit of 5 percent of the federal EITC in tax year 2009 and was scheduled to rise to 10 percent in 2010. Due to the budget shortfall, policymakers have not financed the credit.

Source: StateNet bill tracking up-to-date as of July 2014. Internal Revenue Service, States and Local Governments with Earned Income Tax Credit (Washington, D.C.: IRS, July 2014).

As state lawmakers consider appropriations, many are examining the impact—both good and bad—that earned income tax credits have on state budgets. In 2014, seven states passed EITC-related laws including measures to decrease and increase the credit and to conduct outreach.

Outreach

  • Iowa, H2463, appropriates $195,678 for a local non-profit to provide tax preparation services and conduct EITC outreach.
  • Iowa, S2362, appropriates $10,000 to study the efficacy of using software programs to assist low-income persons to file taxes as compared to in-person assistance. This bill was vetoed by the governor.
  • Virginia, H5001, appropriates $185,725 for 2013 and the same amount for 2014 to the Virginia Community Action Partnership to support the Virginia Earned Income Tax Coalition and provide grants to local organizations to provide outreach, education and tax preparation services to citizens who may be eligible for the federal EITC.

Increase

  • Maryland, H198, increases the state EITC from 25 to 25.5 percent for tax year beginning after December 31, 2014. 
  • Ohio, H483, increases the state EITC from 5 to 10 percent of the federal credit allowed for taxable years beginning in or after 2014.
  • Minnesota, H1777,  increases the income level at which the credit begins to phaseout for married joint filers, retroactive to tax year 2013. This would match the working family credit phaseout to the federal earned income credit phaseout for tax years 2013 and following years.
  • New Jersey, A3485, would have increased the state EITC from 20 to 25 percent as part of an increase to income taxes on income. This bill was vetoed by the governor.

Decrease

  • Rhode Island, H7133A, decreases the state EITC from 25 to 10 percent and makes the credit fully refundable.


Miscellaneous

  • Virginia, H1085, requires the state continue to conform to the temporary enhancements made to the federal EITC by the American Recovery and Reinvestment Act of 2009 and American Taxpayer Relief Act of 2013.

Recipients choose how to spend or save their refund. Research shows that refunds are commonly used to pay bills and debts.  Similar results were reported from a survey of rural families: 44 percent used the tax credit refunds to pay bills.

Arguments For Earned Income Tax Credits:


How Much Do States Spend on EITCs?

Forty-three states and the District of Columbia issue state tax expenditure reports. These reports vary, but all include spending on tax credits, deductions and exemptions. Many also include the specific amount the state refunded in earned income tax credits. In Michigan, for instance, state EITCs totaled $360 million in fiscal year 2012.3 

 

Fiscal Stimulus to the State
Some proponents believe the refundable nature of EITCs pumps new money into the economy. This may provide both immediate and long-term economic stimulus to state budgets, according to the Brookings Institution.

Work Incentive
EITC financially rewards low-to-moderate-income individuals and families who work. The credit increases as earnings increase up to a specified limit. Nationally, the top five industries in which EITC recipients work are retail trade, healthcare, food service and accommodation, construction and manufacturing.

Child Care
Credits such as EITC can free up resources for child care expenses by decreasing the amount of taxes owed. Research finds that single mothers, especially those with low wages, are more likely to be employed and experience an increase in earnings when they receive EITC. It’s suggested that single mothers receiving EITC are more capable of paying for child care and, thus, can get and maintain a job.4

Financial Assets and Savings
EITC refunds can boost financial assets and savings, which may help working families avoid future financial setbacks. Nonprofit and community-based organizations that work with free tax preparation sites also promote financial education and counseling and connect EITC recipients to checking and savings accounts. The IRS provides the option to deposit tax refunds into a savings or checking account or to purchase a U.S. savings bond to anyone who receives a refund, including those who get an EITC.

Arguments Against Earned Income Tax Credits:

Spending More, Collecting Less
One consequence of offering refundable taxes, including EITCs, is that the government pays out more money than it collects in taxes.

Rethinking Spending in Tight Budget Times
Overall, states are reconsidering their expenditures, including their appropriations to EITCs, to address growing deficits. Michigan and Wisconsin reduced their state earned income tax credit in addition to making other cuts due to financial constraints in 2011. Connecticut and North Carolina did the same in 2013.

Overpayments due to Error
Additional revenue is lost due to overpayment as a result of error. The Treasury Inspector General for Tax Administration estimates that the error rate in issuing the tax credit between 22 and 26 percent in fiscal year 2013. The dollar value of these payments was estimated to be between $13.3 billion and $15.6 billion. The most common causes of overpayments are due to errors in reporting income, number of qualifying children and filing status.6 It’s not known how many of these errors are fraudulent claims. 

One of the ways states try to guard against overpayment in EITCs is to issue only non-refundable credits. However, states that offer a non-refundable credit, like Delaware, report that their rate of error is similar to that of the federal government’s.

Refund Anticipation Loans/Checks

Refund anticipation loans (RALs) are short term, high interest loans for taxpayers who want their refund immediately. While federal regulators have ordered banks to discontinue offering these loans after April 2012, non-bank lenders continue to make similar tax-time loans. Refund anticipation checks (RACs) are an alternative product banks offer where a temporary checking account is opened on the taxpayers behalf, a check or prepaid card is issued for the amount of the refund, minus tax preparation and administrative fees. When the refund check is deposited the account is closed.

RAL/RAC Alternatives

The IRS maintains a list of more than 4,000 Volunteer Income Tax Assistance sites established to provide low-cost refund anticipation loan alternatives. These sites can reduce the number of refund application loans taken out by EITC recipients and help them take home the full amount of their refund.

Outreach Regarding EITC Eligibility and Free Tax Preparation Services

The IRS estimates that 21 percent of eligible workers do not claim EITC. Outreach campaigns to increase the number of people who claim the EITC focus on increasing workers’ knowledge about the federal and state credits and promoting the use of Volunteer Income Tax Assistance (VITA) sites and other free tax preparation services. VITA sites offer free tax preparation services to low-to-moderate-income working people and are staffed by volunteers certified by the IRS. Some campaigns target groups, such as those who receive Temporary Assistance for Needy Families benefits, while others reach out to entire communities.

Residents of large cities are more likely to claim the credits because it’s easier for them to find free tax assistance services. Outreach programs like the Rural Family Economic Success Action Network, aim to increase services to rural areas, targeting those who have limited or no free tax preparation services. Specifically, the program focuses on encouraging individuals in rural America to earn income, maintain financial assets and grow wealth.

Many elected officials, state, local and federal government agencies, private companies, philanthropic foundations and nonprofit organizations provide outreach campaigns. Delaware, along with the District of Columbia, and Boston, have used social networking sites like Facebook to publicize information and recruit volunteers. Outreach materials and toolkits are available from The National Community Tax Coalition, the National League of Cities, and the IRS.


 Examples of State and Nonprofit and Private Sector EITC Outreach Campaigns


State Outreach

Iowa:

The Institute for Social Economic Development (ISED) Ventures collaborates with 20 coalitions across the state offering working families free tax preparation services. With seed funding from the Annie E. Casey Foundation, the project first started with a small contingent of 30 volunteers in 2001. he Iowa General Assembly made its first appropriation of $100,000 to ISED in 2005.  Since then the organization has conducted EITC outreach statewide, supported by state funds and federal dollars including the VITA grant. By 2013 the program had grown to over 700 volunteers and served more than 12,000 people resulting in over $17 million in federal refunds, $6.5 million of which was made up of federal EITC refunds in that year. Tax preparers also make filers aware of options to save their refund.

 

Virginia:

The Virginia Creating Assets, Savings and Hope (CASH) Campaign educates, conducts outreach and provides free income tax preparation services to those who may eligible for the EITC. The General Assembly has appropriated funds to the program since 2006. In 2013, $185,725 in state funds were granted to 25 coalitions which prepared federal and state returns for over 26,000 and 24,000 individuals, respectively, resulting in more than $34 million in federal refunds and over $4.6 million in state refunds. In addition 8,164 federal EITC claims were filed, resulting in over $12 million in federal EITC refunds. Taxpayers collectively saved more than $5 million by not paying for tax preparation services. As a Free File state (see below), over 900 eligible taxpayers took the opportunity to prepare their own taxes online for free through the campaign’s Facilitated Self Assistance initiative. The CASH Campaign’s outreach efforts included press releases, public service announcements, newspaper articles, and extensive Facebook, Twitter, radio, and television advertisements.

 

Nonprofit and Private Sector
AARP Foundation: The AARP Foundation Tax-Aide is a free, volunteer-run tax assistance program. It is operated in more than 5,000 sites in all 50 states and the District of Colombia, serving low to moderate-income taxpayers with special attention to adults over age 60. The program helped more than 2.6 million taxpayers file federal and state returns in 2013. Qualified taxpayers collectively received $1.36 billion in federal tax refunds and $244 million in EITC refunds.

 

Citi: Citi will work with local organizations to distribute their brochure in nine states and the District of Columbia in 2014.  The brochures explain how to claim the EITC, list VITA sites that offer free tax preparation services to individuals eligible for the EITC and encourages readers to save for the future. 
 

Intuit and the Free File Alliance: The Intuit Tax Freedom Project, along with 13 other brand-name tax preparation software companies, offers free online tax prep and electronic filing services with their trademark TurboTax Freedom Edition software as a member of the Free File Alliance. The Free File Alliance offers free on-line tax prep software to low-income taxpayers. Twenty-two states and the District of Columbia have created Free File programs based on the federal Free File Alliance model. The Intuit Tax Freedom Project has prepared almost 25 million free filing federal and state returns since 1998.

 

Conclusion

Federal and state earned income tax credits can support low-to-moderate-income, working people. The Internal Revenue Service reports that the EITC raises over 6 million people—half of them children—above the poverty line each year. The earned income tax credit may provide incentives to work and can be a tool to build workers’ financial stability. VITA sites and outreach campaigns promote free tax preparation services, provide low-cost alternatives to RALs and RACs, and ultimately increase the number of people who claim the tax credit. But in times of tight budgets, foregone state revenue from the tax credits can be difficult to justify, causing some state lawmakers to reconsider or decrease funding for EITCs. 

Additional Resources

Internal Revenue Service

National EITC Outreach Partnership

National Conference of State Legislatures

Rural Family Economic Success (RuFES) Action Network

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