The Earned Income Tax Credit, a successful U.S. anti-poverty program, is a refund for low-income workers. Taxpayers who qualify can file for it by April 15. The IRS is likely to extend the tax filing deadline because of the coronavirus pandemic.
Low-income families and individuals should know they might be leaving money on the table if they don’t file for the federal Earned Income Tax Credit (EITC).
The EITC, as it’s known, is a powerful public policy tool for lifting people out of poverty. But many eligible families aren’t claiming their credits.
“The IRS and Census Bureau estimate that only about 78 percent of people who are eligible for the earned income tax credit get it,” Elaine Maag, a senior research associate who specializes in safety net issues at the Washington, D.C.-based Tax Policy Center, wrote in a February blog post.
The EITC and federal child tax credit lift “more people out of poverty than any other government program besides Social Security,” Maag wrote in 2019.
In 2018, she said, the U.S. government paid Americans $300 billion in tax refunds. Refunds related to the EITC and child tax credit, known as the CTC, made up about $100 billion of that amount. Taxpayers file for the CTC when they submit their federal tax returns and claim the EITC.
Some families who file for the EITC and have two or more children can see refunds – or credits – of about 10 percent of their yearly earnings. But as Maag said in 2019: “Because of the EITC and CTC, some low-income parents receive a bump in annual income of over 50 percent and many get refunds that exceed a month’s income.”
That money can help families pay for food, housing, medicine, health care, transportation and school-related expenses.
The IRS began accepting tax returns on Jan. 27. The federal tax filing deadline is April 15, but the U.S. government is likely to extend it for some workers and businesses in 2020 because of the coronavirus pandemic. Check with the IRS for updates.
With the 2020 tax filing season underway, Equal Voice is providing this general FAQ about the EITC for families and individuals.
How does the tax credit work?
Here’s how it works, using an example from 2017. For a single working parent with two children, the first dollar earned in the tax year is credited 40 cents, up until the first $14,040 of annual income. After that, additional earnings don’t reduce your credit, until you hit $18,340 in annual income. At that point, each additional dollar earned reduces your credit by about 21 cents, until the credit zeros out at income greater than $45,007.
One of the trickiest parts of the EITC for the tax filer is determining who qualifies as a dependent child. For anyone claiming dependent children under the program, the IRS requires Schedule EIC, which walks you through determining who qualifies. A critical point is that the child must have lived with you for more than six months of the year, even if you paid most of the child’s living expenses.
How much tax credit can be claimed?
The maximum amount of the EITC you can claim for tax-year 2019 is: $6,557 with three or more qualifying children, $5,828 with two qualifying children, $3,526 with one qualifying child and $529 with no qualifying children. If the EITC amount you qualify for is greater than your total tax liability, the government pays the difference back to you.
Why does the EITC exist?
“The EITC is set out to encourage work, and also boost the earnings of low-income workers,” said Hunter Blair, a budget analyst with Economic Policy Institute, a progressive think tank. “It incentivizes people who are low-income workers to work more hours and incentivizes people who are not in the labor force to enter the labor force.”
The EITC started in 1975.
How many Americans benefit from the EITC?
During 2019, roughly 25 million eligible workers and families received about $61 billion in tax credits under the EITC. The government estimates these working-family tax credits lift millions of people out of poverty, more than half of whom are children.
The U.S. Census Bureau counted 38.1 million people in the country who were living, by official standards, in poverty in 2018, the last year for which there is government data (The actual amount of poor people in the U.S. could be as high as 140 million, according to The Institute for Policy Studies).
The U.S. government uses its “poverty thresholds” definition, which is updated yearly, to determine qualification. For example, for 2020, the poverty threshold for a household of four people is $26,200 in yearly earnings.
What are some other benefits of the EITC?
Tax Credits for Workers and Their Families reports the EITC also advances equity by narrowing gender and racial wealth gaps, improves educational and health outcomes – particularly for pregnant women and babies – and offers a form of support to U.S. military families and veterans.
How do I know if I qualify for the EITC?
The IRS lists qualifications, such as having a valid Social Security number and being a U.S. citizen or resident alien for the full year. The IRS also has information about qualifying children under the EITC.
If I qualify and file for the EITC, when will my refund arrive?
EITC-related refunds started arriving in taxpayers’ bank accounts or on debit cards in early March, according to the IRS. People can check the status of their refund on the IRS website or via the IRS mobile app.
Do all qualifying workers apply for the EITC?
No. The IRS estimates one in five of all eligible workers do not file for the credit. The IRS and nonprofit organizations encourage spreading the word about this anti-poverty program so that all eligible workers apply.
Among those who typically do not apply are residents in rural areas, grandparents raising their grandchildren, the self-employed, people who are not proficient in English and those who receive disability pensions.
Can I apply for the federal EITC for past years if I didn’t do so?
Do states and cities offer an EITC?
Yes. In addition to the federal EITC, many states plus New York City and Washington, D.C. offer tax credits for qualifying low-income workers. The majority of them are refundable, meaning the government will pay out any credit in excess of the taxpayer’s liability. To see if you qualify, the IRS publishes a full list of state and local EITC policies.
Is it worth applying for the EITC through a tax processing company?
“No one can get you your refund faster than you can going through the IRS,” Maag said in 2019.
There is concern, she and others have said, about low-income families taking out quick loans to pay a third-party company to submit federal tax returns and file for the EITC on their behalf. Families can get trapped in high-interest loan rates that create debt for months or years to come.
What about the EITC and childless workers?
One of the key criticisms of the EITC is how it favors low-income workers with children, as opposed to childless workers, who qualify for a maximum credit of just $529. A childless married couple filing jointly have to make less than $21,370 to qualify for any refund under the EITC.
“There has been, in the past at least, bipartisan claims that it’s something important to be doing something toward increasing the EITC for childless workers,” said Blair of the Economic Policy Institute.
Does the EITC have bipartisan support among elected officials?
Yes. It has received bipartisan support as an anti-poverty measure since it was first rolled out in 1975. There also has been discussion about expanding the EITC at the state and federal levels.
This FAQ includes reporting and research from Amy Rolph, contract editor for Marguerite Casey Foundation; Brad Wong, Marguerite Casey Foundation communications manager; and Keith Griffith, a journalist in New York City. Equal Voice is Marguerite Casey Foundation’s publication featuring stories of America’s families creating social change. With Equal Voice, we challenge how people think and talk about poverty in America. The text of this story and images by Paul Joseph Brown, a freelance photographer, can be reproduced for free, as long as proper credit and a link to our homepage are included. Parts of this story appeared on Equal Voice in 2018 and 2019.