Tax Credits for Working Families: Earned Income Tax Credit (EITC)

3/25/2019

The earned income tax credit (EITC) is a policy the federal government, 30 states, the District of Columbia, Guam, Puerto Rico and some municipalities have implemented to support the economic secuirty of low-income working families, especially those with children.

EITCs reduce the tax liability of qualifying taxpayers in an amount determined mostly by their income level, marital status and number of dependent children. The federal EITC has been in place since 1975 and Rhode Island enacted the first state EITC in 1986. 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 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 must be filed with the Internal Revenue Service (IRS) that includes proper documentation. 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 2018 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. 

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, 29 states, the District of Columbia, Guam and Puerto Rico have EITCs.
  • More than 25 million eligible tax-filers received almost $63 billion in federal EITC during the 2017 tax year.
  • The average EITC amount recieved per tax-filer was $2,488 during the 2017 tax year. 
  • An estimated 20 percent of eligible workers do not claim EITC. To improve participation rates, the IRS sponsors an annual awareness day.

 

Table 1: 2019 tax year income limits for the federal EITC for single and married individuals

CHILDREN

MAXIMUM CREDIT

MAXIMUM EARNINGS

    Single Married

Childless

$529

$15,570

$21,370

One Child

$3,526

$41,094

$46,884

Two Children

$5,828

$46,703

$52,493

Three or More Children

$6,557

$50,162

$55,952

Source: Internal Revenue Service, EITC Income Limits, Maximum Credit Amounts and Tax Law Updates (Washington, D.C: IRS, 2019).

 

For a complete distribution of federal EITC tax-filings and total credit value by state, see the IRS EITC statistics page.

What Are the 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 percent in Montana to 125 percent 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 can 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—appropriated funds or implemented 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, Reflecting Legislative Enactments as of January 2019

 

STATE

PECENTAGE OF FEDERAL CREDIT

Refundable?

California

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

Link to 2018 Instructions

Yes

Colorado

10

Yes

Connecticut

30

Yes

Delaware

20

No

Hawaii 20 No

Illinois

10

Yes

Indiana

9

Yes

Iowa

15

Yes

Kansas

17

Yes

Louisiana

5

Yes

Maine

5

Yes

Marylandb

26

Yes

50

No

Massachusetts

23

Yes

Michigan

6

Yes

Minnesotac

 

Based 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 Carolinae 125 No
Utah 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:

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.

eSouth 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 20.83% applying in tax year 2018.

Source: StateNet bill tracking up-to-date as of July 2016. Internal Revenue Service, States and Local Governments with Earned Income Tax Credit (Washington, D.C.: IRS, July 2016).

2018 EITC Legislation

During 2018 sessions, eight states enacted laws addressing their state EITCs. California and Maryland became the first states to expand the definition of "EITC eligible individuals” to include workers without children who are between the ages of 18 and 24 and older than 65, making their state EITCs more inclusive than the federal credit.

In addition, Louisiana, Maryland, New Jersey and Vermont increased the value of their EITC. Wisconsin created a two-year pilot program where EITC claimants receive the credit in monthly installments rather than as a lump sum at tax time. The inspiration for the pilot came from the success of a similar project in Chicago, where 90 percent of the 229 participants reported a preference for the periodic payments.

2017 EITC Legislation

During 2017 sessions, more than 200 bills related to EITCs were introduced and at least nine states enacted new laws. HawaiiMontana and South Carolina created state EITCs and CaliforniaIllinoisNew Jersey and Rhode Island increased the percentage or reach of their credits.

2016 EITC Legislation

As state lawmakers consider appropriations, many are examining the impact—both good and bad—that earned income tax credits have on state budgets. In 2016, eight states passed EITC-related laws including measures to increase the rate of the credit, conduct outreach, change refundability status of the credit and make various provisions permanent.

EITC Outreach

  • Arizona HB 2622: Requires the Department of Economic Security to provide all childcare subsidy recipients with information on the EITC.
  • California SB 826: Appropriates $11,752,000 for implementation of the state's EITC including processing returns, auditing, and making necessary system changes to support the EITC program. Also specifies that $2,000,000 of this appropriation be used to support nonprofit and community-based organizations that increase awareness of the state EITC and free tax preparation assistance.
  • Iowa HB 2460: Appropriates $195,678 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.
  • Virginia HB 1026: This bill increases outreach to potential EITC recipients by requiring the Department of Social Services to provide notice to recipients of various state benefits of the availability of the federal and state EITC—this information must be distributed annually and include information on the qualifying income levels, the amount of credit available, the process for applying for the credit and the availability of assistance in applying for the credit.
  • Virginia HB 29 (Budget Bill): Appropriates two years of funding ($185,725 from the general fund for the first year and $185,725 from the Temporary Assistance for Needy Families block grant for the second year) to contract with a nonprofit to provide outreach, education and tax preparation services to reach residents who may be eligible for the federal EITC. 

Refundability Change

Change in Provisions

Increase in EITC Rate

  • Oregon HB 4110: Increases Oregon’s state EITC from 8% of the federal credit to 11% of the federal credit for families with children under the age of 3.
  • Rhode Island HB 7454: Increases the state's EITC from 12.5 to 15 percent of the federal credit.

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

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. Since, Connecticut has expanded their state EITC to 30 percent of the federal credit.

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. 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. In 2014, over 600 volunteers served almost 15,000 people resulting in over $18 million in federal refunds, $7.7 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.

Alabama

In 2013, the Alabama legislature appropriated funding to the SaveFirst program of ImpactAlabama, where college students volunteer to prepare tax returns for those who are eligible for the EITC. The program encourages their clients to save some of their tax refund with their SaveNow WinLater initiative. For every $50 saved in a U.S. savings bond, the savers name goes into a drawing for a grand prize jackpot of $10,000. Almost 600 student volunteers prepared taxes for 8,230 families in 2014. Collectively families claimed $14.9 million in federal tax refunds and saved $2.5 million.

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. 
 

Free File Alliance: The Free File Alliance, in partnership with the IRS, is a nonprofit coalition of 13 industry-leading tax software companies that offer free online tax prep software to low-income taxpayers. Taxpayers with an adjusted gross income of $60,000 or less—estimated to be nearly 100 million Americans—can qualify to file their taxes through the Free File Alliance. More than 43 million returns have been filed since it began in 2003. In addition to the federal program, 20 states and the District of Columbia offer their own state run Free File programs based on the federal Free File Alliance model. 

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

NCSL