Back 

Earned Income Tax Credits for Working Families

Tax Credits for Working Families: Earned Income Tax Credit

Qiana Torres Flores 1/30/2014

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. To claim the earned income tax credit, a tax return must be filed with the Internal Revenue Service (IRS) that includes proper documentation.

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 $63 billion in federal, refundable credits in tax year 2012.

Table 1.
2013 Income Limits for the Federal EITC

Individuals Claiming EITC

No Children

One Child

Two Children

Three + Children

Maximum Earned Income

$14,340

$37,870

$43,038

$46,227

Maximum Credit

$487

$3,250

$5,372

$6,044

 

Married Couples Claiming EITC

No Children

One Child

Two Children

Three + Children

Maximum Earned Income

$19,680

$43,210

$48,378

$51,567

Maximum Credit

$487

$3,250

$5,372

$6,044

 

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

Table 2.
Federal Earned Income Tax Credit by State for Tax Year 2012

State/Jurisdiction

Number of
 Recipients
(in thousands)

Average
EITC Amount
(in dollars)

Total
EITC Amount
(in millions)

Alabama

518

$2,685

$1,400

Alaska

48

2,011

97

Arizona

550

2,467

1,400

Arkansas

300

2,491

747

California

3,000

2,331

6,900

Colorado

348

2,130

741

Connecticut

211

2,075

438

Delaware

71

2,257

161

Florida

2,000

2,413

4,900

Georgia

1,000

2,634

2,800

Hawaii

109

2,144

233

Idaho

133

2,236

297

Illinois

1,000

2,378

2,400

Indiana

547

2,286

1,200

Iowa

208

2,115

441

Kansas

213

2,235

475

Kentucky

401

2,299

923

Louisiana

518

2,680

1,400

Maine

100

1,978

199

Maryland

402

2,233

898

Massachusetts

394

1,991

784

Michigan

813

2,332

1,900

Minnesota

339

2,061

698

Mississippi

392

2,747

1,100

Missouri

513

2,320

1,200

Montana

80

2,043

163

Nebraska

134

2,210

296

Nevada

229

2,321

532

New Hampshire

78

1,882

147

New Jersey

568

2,209

1,300

New Mexico

213

2,342

500

New York

1,700

2,255

3,900

North Carolina

910

2,412

2,200

North Dakota

42

2,003

84

Ohio

949

2,307

2,200

Oklahoma

334

2,387

796

Oregon

273

2,048

559

Pennsylvania

907

2,123

1,900

Rhode Island

80

2,189

176

South Carolina

487

2,453

1,200

South Dakota

63

2,093

132

Tennessee

648

2,435

1,600

Texas

2,600

2,615

6,700

Utah

191

2,282

437

Vermont

45

1,840

83

Virginia

598

2,238

1,340

Washington

438

2,100

920

West Virginia

155

2,156

335

Wisconsin

385

2,113

813

Wyoming

37

1,988

74

District of Columbia

52

2,248

117

Total

27,120

2,310

$62,643

SourceInternal Revenue Service, EITC Statistics (Washington, D.C.: IRS, January 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 $63 billion in federal, refundable credits in tax year 2012.
  • 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. And in Rhode Island, if the credit is larger than the amount owed in taxes, the taxpayer receives only a partial refund.
 

States determine eligibility for the credits based on the federal requirements. 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, as of January 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

Yes

50

No

Massachusetts

15

Yes

Michigan

6

Yes

Minnesotac

Average 33

Yes

Nebraska

10

Yes

New Jersey

20

Yes

New Mexico

10

Yes

New York

30

Yes

Ohio

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

No

State

Percentage of
Federal Credit

Refundable?

Oklahoma

5

Yes

Oregon

8

Yes

Rhode Islandd

25

Partially

Vermont

32

Yes

Virginia

20

No

Washingtone        

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 percent refundable or a 50 percent non-refundable EITC. Taxpayers can chose to claim either, but not both.
c—The Minnesota credit for families with children is calculated as a percentage of income. The credit for people with children can range from 25 percent to 45 percent of the federal credit; taxpayers with no children can receive a 25 percent credit.
d—Rhode Island offers a 10-15 percent partial refund of the state credit.
e—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 January 2014. Internal Revenue Service, States and Local Governments with Earned Income Tax Credit (Washington, D.C.: IRS, August 2013).

As state lawmakers consider appropriations, many are examining the impact—both good and bad—that earned income tax credits have on state budgets. From 2011 to 2012, seven states passed EITC-related laws, although one was vetoed by the governor. During the 2013 legislative session, 11 states enacted legislation pertaining to EITC including measures to decrease and increase the credit and to conduct outreach:

Outreach

  • Alabama, HJR29, recognizes the SaveNow WinLater, a program administered by SaveFirst, which provides tax preparation services to qualifying EITC recipients and promotes savings.
  • Iowa, S446, appropriates $195,678 for tax preparation and EITC outreach.
  • Michigan, HR15, declared a Show Me The Money Day on the last Saturday in January to coincide closely with the National EITC Awareness Day. Communities will kick off tax season by offering financial resources: free financial education classes, affordable financial products, and saving and asset building programs at local events.
  • Virginia, H1500, appropriates $185,725 to the Virginia Community Action Partnership to support the Virginia Earned Income Tax Coalition. The organization will report the statistics regarding the number of people eligible for and receiving the tax coalition’s services.

Increase

  • Colorado, S1, makes the state EITC of 10 percent of the federal credit, permanent and refundable. Implementation of the credit is contingent upon state revenues reaching the level specified by the Taxpayer Bill of Right Act. This bill also appropriates an additional $60,000 from general funds for programming services to implement this act.
  • Iowa, S295, increases the state EITC from 7 to 14 percent for taxable year 2014 and 15 percent for 2015.
  • Minnesota, H.F. 677/S.F. 552, increases the income level at which the credit begins to phaseout for married joint filers, beginning in tax year 2013.
  • New Jersey, A3029, was intended to increase state EITC from 20 to 25 percent of the federal credit. The bill was vetoed by the governor.
  • Ohio, H59, creates a nonrefundable state EITC at 5 percent of the federal credit and limited to 50 percent of liability for Ohio Taxable Income above $20,000.
  • Oregon, H360, increases the state EITC from 6 to 8 percent beginning Jan. 1, 2014.

Decrease

  • Connecticut, H6704, reduces the state EITC from 30 percent to 25 percent in tax year 2013. In tax year 2014 the percentage will increase to 27.5 percent. Any state or federal EITC refund is not to be counted as a resource when determining a person's eligibility for state and federal benefits and services.
  • North Carolina, H82, reduces state EITC for the taxable year 2013 from 5 to 4.5 percent. Repeals state EITC for taxable years beginning January 2014.

Miscellaneous

  • Oregon, H3367, extends the sunset of the earned income tax credit to 2020. 
  • Virginia, S1241 and H2150, 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.

 

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, manufacturing and construction.

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.

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 was between 21 and 25 percent for the 2012 fiscal year, costing between $11.6 and $13.6 billion. The primary causes of overpayments are due to fraudulent claims and unintended errors in taxpayer-provided information such as income reporting on the W2 form and confusion about IRS requirements for qualifying children.

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 it 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 20 percent of eligible workers do not claim EITC. Outreach campaigns to increase the number of people who claim the earned income tax credit 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. The 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 in an effort to get them on the path to financial stability.

 

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, 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 in 9 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 (www.irs.gov)

National Community Tax Coalition (http://tax-coalition.org/)

National Conference of State Legislatures (www.ncsl.org)

Rural Family Economic Success (RuFES) Action Network (http://rufes.org/)

Share this: 
We are the nation's most respected bipartisan organization providing states support, ideas, connections and a strong voice on Capitol Hill.

NCSL Member Toolbox

Denver

7700 East First Place
Denver, CO 80230
Tel: 303-364-7700 | Fax: 303-364-7800

Washington

444 North Capitol Street, N.W., Suite 515
Washington, D.C. 20001
Tel: 202-624-5400 | Fax: 202-737-1069

Copyright 2014 by National Conference of State Legislatures