Earned income tax credit

Earned income tax credit logo

The United States federal earned income tax credit or earned income credit (EITC or EIC) is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. The amount of EITC benefit depends on a recipient's income and number of children. Low-income adults with no children are eligible.[1] For a person or couple to claim one or more persons as their qualifying child, requirements such as relationship, age, and shared residency must be met.[2][3]

EITC phases in slowly, has a medium-length plateau, and phases out more slowly than it was phased in. Since the credit phases out at 21% (more than one qualifying child) or 16% (one qualifying child), it is always preferable to have one more dollar of actual salary or wages considering the EITC alone. However, investment income is handled far less gracefully, as one more dollar of income can result in a sudden and complete loss of the credit. If the EITC is combined with multiple other means-tested programs such as Medicaid or Temporary Assistance for Needy Families, it is possible that the marginal tax rate approaches or exceeds 100% in rare circumstances depending on the state of residence; conversely, under certain circumstances, net income can rise faster than the increase in wages because the EITC phases in.[4]

The earned income tax credit has been part of political debates in the United States over whether raising the minimum wage or increasing EITC is a better idea.[5][6][7] In a random survey of 568 members of the American Economic Association in 2011, roughly 60% of economists agreed (31.7%) or agreed with provisos (30.8%) that the earned income tax credit program should be expanded.[8] In 2021, when the survey was done again, the percentage of economists that agreed to expanding the credit increased to 90%.[9]

  1. ^ Cite error: The named reference IRSEITC2021 was invoked but never defined (see the help page).
  2. ^ EITC IRS instructions Internal Revenue Service, "EITC Home Page--It’s easier than ever to find out if you qualify for EITC"
  3. ^ Tax Year 2020 1040 and 1040-SR Instructions, including the instructions for Schedules 1 through 3, Rules for EIC begin on page 40 for 2020 Tax Year.
  4. ^ Maag, Elaine; Steuerle, C. Eugene; Chakravarti, Ritadhi; Quakenbush, Caleb (December 2012). "How Marginal Tax Rates Affect Families at Various Levels of Poverty". National Tax Journal. 65 (4). National Tax Association: 759–782. doi:10.17310/ntj.2012.4.02. ISSN 0028-0283.
  5. ^ Rizzo, Salvador (January 28, 2013). "Gov. Christie rejects minimum wage increase, offers alternative". NJ.com. Retrieved August 30, 2024.
  6. ^ Saltsman, Michael (February 14, 2013). "The $9 Minimum Wage That Already Exists". The Wall Street Journal. ISSN 1042-9840. Retrieved August 30, 2024 – via Employment Policies Institute.
  7. ^ Romer, Christina D. (March 2, 2013). "The Business of the Minimum Wage". The New York Times. ISSN 0362-4331. Retrieved August 30, 2024.
  8. ^ Fuller, Dan; Geide-Stevenson, Doris (2014). "Consensus Among Economists—An Update". The Journal of Economic Education. 45 (2): 131–146. doi:10.1080/00220485.2014.889963. S2CID 143794347.
  9. ^ Geide-Stevenson, Doris; La Parra Perez, Alvaro (December 2021). "Consensus among economists 2020 – A sharpening of the picture". Weber State University. Archived from the original on August 29, 2024. Retrieved August 31, 2024.