Earned Income Tax Credit
Introduction
The federal Earned Income Tax Credit (EITC) is a refundable tax credit for low income working families. For those who qualify, EITC reduces their income tax bill and provides a refund for those who did not pay income taxes. Enacted in 1975, it has been expanded and modified numerous times since then. Affecting millions of American families, EITC is both an important anti-poverty program and a source of controversy because of concerns about the payment of unjustified claims for the credit. This article will outline the structure of the EITC and describe current issues with its application. A number of states have their own Earned Income Tax credits; this article focuses on the federal EITC.
Qualifying for the EITC
To be eligible for the EITC, taxpayers must fall within ranges based on income. The amount of the credit is dependent upon earned income and adjusted gross income, as well as whether the taxpayer has qualifying children, and how many qualifying children. The word qualifying is crucial here, because children must meet tests based on residency, relationship, and age in order for their parents to claim them for EITC purposes. Given the intent of the EITC to benefit working families, married taxpayers filing separately are not eligible for the EITC, although a small credit is now available to taxpayers without any qualifying children.
Once eligibility is established, payment of the EITC proceeds according to a three-part structure. There is a phase-in range, in which the credit increases as earnings increase, a plateau range once the maximum credit is reached, and a phase-out range in which the credit decreases as earnings increase. In tax year 2003, the maximum credit was $4,204 (for taxpayers with two or more children), and the income phase-out level was $34,692 (married taxpayers filing jointly, with two or more children).
Issues in the Application of the EITCIn a program as large as the EITC, with billions of dollars in credits available ($39 billion paid out in tax year 2003) to millions of taxpayers, issues are bound to arise. On the one hand, a significant percentage of taxpayers eligible for the tax do not claim it. According to the Government Accountability Office and the IRS, this percentage is between 15 and 25 percent. On the other hand, the Treasury Department estimates that as much as $9 billion in unjustified claims may have been made in 2005. Treasury and the IRS are working to reduce the overclaim rate by making changes in the administration of the program, such as closer monitoring of the residency of children claimed as qualifying children by the taxpayer.
Another current issue regarding the EITC is its connection to businesses who market loans described as "instant" tax refunds, often carrying what are arguably excessive interest rates. Although an IRS program called Advanced EITC allows taxpayers to have their EITC refund distributed in paychecks throughout the year, many taxpayers use tax preparers or other business to gain their entire refunds immediately through loans made at high rates of interest. In California, the state attorney general has sued one large tax preparation company seeking to stop the practice, claiming that the interest rates are excessive and that the refunds are not issued any faster than from a return filed electronically.
Copyright © 1994-2006 FindLaw, a Thomson business
DISCLAIMER: This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.
