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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: Standard Federal EITC 2021 Income Limits (figures do not reflect temporary changes enacted through the American Rescue Plan Act of 2021)
|
CHILDREN
|
MAXIMUM CREDIT
|
MAXIMUM EARNINGS
|
| |
|
Single |
Married |
|
Childless
|
$543
|
$15,980
|
$21,920
|
|
One Child
|
$3,618
|
$42,158
|
$48,108
|
|
Two Children
|
$5,980
|
$47,915
|
$53,865
|
|
Three or More Children
|
$6,728
|
$51,464
|
$57,414
|
American Rescue Plan Act of 2021
The American Rescue Plan Act of 2021 temporarily expands eligibility and increases the maximum credit for individuals that qualify as childless. The maximum credit increases from $543 to $1,502. The income level at which the credit begins to phase out increases from $8,880 to $11,610 (and from $14,820 to $17,550 if married).
The minimum age of eligibility is reduced from 25 to 19, and for students attending school at least part time the age limit is reduced from 25 to 24. The minimum age of eligibility for former foster youth and youth experiencing homelessness is temporarily reduced from 25 to 18.
These changes are only applicable for the 2021 tax year. For more information on these changes, please see The “Childless” EITC: Temporary Expansion for 2021 Under the American Rescue Plan Act of 2021, Congressional Research Service, May 2021.
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 California, Indiana, Minnesota 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. Beginning in 2023, Washington will offer set dollar amounts. California, Colorado, Maryland and Washington expanded eligibility to include individuals using a valid individual taxpayer identification number or similar.
Approximately half of state EITCs (24 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.
