Earned Income Tax Credit Overview

7/8/2020

Earned income tax credits (EITC) are a common strategy used by governments to bolster the economic security of low-income working families, especially those with children. By reducing personal income tax liability, low-income tax filers retain more of their income. The amount of a tax credit is determined mostly by income level, marital status and number of dependent children.

Quick Facts

  • EITCs are a tax benefit designed to help low- to moderate-income working people.
  • The federal government, 30 states, the District of Columbia, Guam, Puerto Rico and some municipalities have EITCs.
  • The federal EITC has been in place since 1975, and Rhode Island enacted the first state EITC in 1986. 
  • More than 25 million eligible tax filers received almost $63 billion in federal EITC during the 2019 tax year.
  • The average EITC amount received per tax filer was $2,476 during the 2019 tax year. 
  • Workers must file tax returns to receive the credit.
  • An estimated 20% of eligible workers do not claim EITC. To improve participation rates, the IRS sponsors an annual awareness day.

Federal Earned Income Tax Credit 

The federal EITC is a tax credit that reduces the amount of federal income tax owed and is refundable if the tax filer's credit is larger than their tax liability. To claim the EITC, a tax return with proper documentation must be filed with the Internal Revenue Service (IRS). The amount of 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. 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. For a complete list of requirements and the exact 2019 tax year EITC calculation, see IRS Publication 596.

For a complete legislative history of the federal EITC, see The Earned Income Tax Credit (EITC): A Brief Legislative History, Congressional Research Service, March 2018. For a complete distribution of federal EITC tax-filings and total credit value by state, see the IRS EITC statistics page.

Table 1: Federal EITC 2020 Income Limits

CHILDREN

MAXIMUM CREDIT

MAXIMUM EARNINGS

    Single Married

Childless

$538

$15,820

$21,710

One Child

$3,584

$41,756

$47,646

Two Children

$5,920

$47,440

$53,330

Three or More Children

$6,660

$50,594

$56,844

Source: Internal Revenue Service, EITC Income Limits, Maximum Credit Amounts and Tax Law Updates (Washington, D.C: IRS, 2020).
 

State Earned Income Tax Credits 

State earned income tax credits provide an additional benefit to the federal credit for low-income taxpayers by reducing their state income tax liability. For example, in 2017, 1.4 million families in California shared a total of $325 million in state credits, bolstering the $6.8 billion they received in federal credits. Current state EITC policies are mostly modeled after the federal credit, but vary somewhat on eligibility standards, methods for calculating the credit amount, refundability, awareness and outreach efforts, and data tracking requirements.

State EITC eligibility requirements often closely match federal requirements. There are some differences, however. Wisconsin’s credit does not apply to childless workers, and California’s credit focuses on a narrower segment of income levels than the federal credit. Similarly, most states—with notable exceptions including CaliforniaIndianaMinnesota and New York (Tax § 606)—calculate their EITCs as a simple percentage of the federal credit, ranging from 3% in Montana to 125% in South Carolina.

Most state EITCs (23 states, D.C., Guam and Puerto Rico), like the federal credit, are refundable. To be eligible for EITC refunds at the state and federal levels, a tax return must be filed. Since many low-income workers are not required to file a return, they often miss out on the full value of refundable credits. In response, several states have implemented measures to increase the awareness of EITCs. Iowa and Maine are among states that require beneficiaries of certain assistance programs to be informed of the benefits of EITCs. Laws in Oregon, Vermont and Virginia directly charge state agency heads with leading EITC outreach activities. Oregon requires its Bureau of Labor and Industries commissioner to adopt rules requiring employers to share information about state and federal EITCs with their employees. In addition, several states—including Iowa, Oklahoma, Texas and Virginia—appropriate funds or implement measures to help state and federal EITC-eligible families prepare their tax filings.

Some states—including California, New Jersey and Hawaii—require state EITC statistical data to be collected and reported. Hawaii’s law, for example, requires the director of taxation to prepare an annual report detailing the number of credits granted, the total dollar amount granted and the average credit value distributed for specified income ranges during the prior calendar year

 
Table 2: State Earned Income Tax Credits as of June 2020

STATE

PECENTAGE OF FEDERAL CREDIT

REFUNDABLE

California

California uses different income levels and phase out calculations than the federal EITC.

Yes

Colorado

10%

Yes

Connecticut

23%

Yes

Delaware

20%

No

Hawaii 20% No

Illinois

18%

Yes

Indiana

9%

Yes

Iowa

15%

Yes

Kansas

17%

Yes

Louisiana

3.5%

Yes

Maine

25% for workers w/o dependent children; 12% for all other eligible workers

Yes

Marylanda

28%

50%

Yes

No

Massachusetts

30%

Yes

Michigan

6%

Yes

Minnesotab

25% to 45% (depends on income)

Yes

Montana  3% Yes

Nebraska

10%

Yes

New Jersey

40%

Yes

New Mexico

10%

Yes

New York

30%

Yes

Ohio

30%

No

Oklahoma

5%

No

Oregon

9%

12% (for families with children under the age of 3)

Yes

Rhode Island

15%

Yes

South Carolinac 62.5% in 2020; 125% by 2023  No
Utah 10% Yes

Vermont

36%

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—Maryland offers a 28% refundable or a 50% non-refundable EITC. Taxpayers can claim either, but not both.

b—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.

c—South Carolina -125% phased-in in six equal installments of 20.83% each tax year until it is fully phased-in in tax year 2023, with the 62.50% applying in tax year 2020.

d—Washington enacted a refundable credit of 5% of the federal EITC in tax year 2009. It was scheduled to increase to 10% in 2010; however, policymakers have not financed the credit.

Source: StateNet bill tracking current as of June 2020. Internal Revenue Service, States and Local Governments with Earned Income Tax Credit (Washington, D.C.: IRS, April 2020).

2020 Enacted EITC Legislation

  • California SB 74: Appropriates $14,923,000 for the implementation of the earned income tax credit. Requires $5,000,000 of the amount appropriated to be allocated in a manner that emphasizes nonprofit and community-based organizations that provide increased awareness of the California Earned Income Tax Credit.
  • California AB 89: Appropriates $16,321,000 for the implementation of the earned income tax credit. Requires $5,000,000 of the amount appropriated to be allocated in a manner that emphasizes nonprofit and community-based organizations that provide increased awareness of the California Earned Income Tax Credit.
  • California AB 93: Appropriates funds to expand the allowance of earned income tax credits and the refundable young child tax credit to additional eligible individuals, removes the requirement that social security numbers be included on the tax return of eligible individuals, and defines a qualified taxpayer to mean an eligible individual who has been allowed an earned income tax credit and has at least one qualifying child younger than 6 years old.
  • Iowa HF 2643Appropriates $195,000 for continuation of a grant to an Iowa-based nonprofit for the purpose of providing tax preparation assistance in order to assist low-income residents with tax filing and expand usage of the EITC.
  • New Jersey AB 3: Appropriates $187,500 to notify unemployment compensation recipients of the availability of the state EITC.
  • Virginia HB 29: Provides an appropriation from the Temporary Assistance for Needy Families (TANF) block grant to contract with the Virginia Community Action Partnership to provide outreach, education and tax preparation services via the Virginia Earned Income Tax Coalition and other community non-profit organizations to citizens who may be eligible for the federal Earned Income Tax Credit. Requires the Virginia Community Action Partnership to report on its efforts to expand the number of Virginians who are able to claim the federal EITC, including the number of individuals identified who could benefit from the credit, the number of individuals counseled on the availability of federal EITC, and the number of individuals assisted with tax preparation to claim the federal EITC.
  • Virginia HB 30: Provides an appropriation from the Temporary Assistance for Needy Families (TANF) block grant to contract with the Virginia Community Action Partnership to provide outreach, education and tax preparation services via the Virginia Earned Income Tax Coalition and other community non-profit organizations to citizens who may be eligible for the federal Earned Income Tax Credit. Requires the Virginia Community Action Partnership to report on its efforts to expand the number of Virginians who are able to claim the federal EITC, including the number of individuals identified who could benefit from the credit, the number of individuals counseled on the availability of federal EITC, and the number of individuals assisted with tax preparation to claim the federal EITC.
  • Virginia HB 341: Authorizes the Department of Taxation to share tax information related to the federal earned income tax credit and the Virginia income tax credit for low-income taxpayers with the Department of Social Services as necessary to administer the outreach and enrollment related to such credits.

Additional Resources

NCSL

Internal Revenue Service

National EITC Outreach Partnership