The United States ^ b. English is the de facto language of American government and the sole language spoken at home by 80% of Americans age five and older. Spanish is the second most commonly spoken language federal Earned Income Tax Credit (EITC or EIC) is a refundable tax credit Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is a recognition of partial payment already made towards taxes due. A similar concept exists in the French tax system, for example in the Credit Impot Recherche. This situation arises, for example, when standard rate tax has been deducted at source ("; it is means tested Resentment over a means test was among the factors giving rise to the National Unemployed Workers' Movement in the United Kingdom. Today, several benefit payments by the government are means-tested, meaning that the entitlement to it is affected by the amount of income and savings. October 2006 saw the introduction of means testing as part of the, and designed to encourage low-income workers and offset the burden of U.S. payroll taxes. For tax year 2009, a claimant with one qualifying child can receive a maximum credit of $3,043. A claimant with two qualifying children can receive a maximum credit of $5,028. The credit is expanded for tax year 2009 and 2010. For claimants with three or more qualifying children, the maximum credit is $5,657. Grandparents, aunts, uncles, and siblings can also claim a child as their qualifying child provided they shared residence with the child for more than six months of the tax year. However, in tie-breaker situations in which more than one filer claims the same child, priority will be given to the parent. A foster child also counts provided the child has been officially placed by an agency or court. There is a much more modest EIC for persons and couples without children that reaches a maximum of $457.^[1]

A qualifying child can be up to and including age 18 at the end of the tax year, up to and including age 23 if classified as a full-time student for one long semester or equivalent, or any age if classified as “permanently and totally disabled” (one year or more).^[2]

Enacted in 1975, the initially modest EIC has been expanded by tax legislation on a number of occasions, including the more widely-publicized Reagan EIC expansion of 1986. The EIC was further expanded in 1990, 1993, and 2001 regardless of whether the act in general raised taxes (1990, 1993), lowered taxes (2001), or eliminated other deductions and credits (1986). Today, the EITC is one of the largest anti-poverty tools in the United States (despite the fact that most income measures, including the poverty rate, do not account for the credit).

Other countries with programs similar to the EITC include the United Kingdom The United Kingdom of Great Britain and Northern Ireland[note 7] is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of the island of Ireland, and many small islands. Northern Ireland is the only part of the UK with a land (see: working tax credit Working tax credit , in the United Kingdom, is a payment from the state for people who work on a low income. It is a part of the current tax credits system - part of the system of means-tested social security benefits. As well as Working Tax Credit, people may also be entitled Child tax credit (CTC) if they are responsible for a child or children), Canada The land occupied by Canada was inhabited for millennia by various groups of Aboriginal peoples. Beginning in the late 15th century, British and French expeditions explored, and later settled, along the Atlantic coast. France ceded nearly all of its colonies in North America in 1763 after the Seven Years' War. In 1867, with the union of three, Ireland Ireland (pronounced [ˈaɾlənd],; Irish: Éire, pronounced [ˈeːɾʲə] ( listen); Ulster Scots: Airlann) is the third largest island in Europe and the twentieth largest island in the world. It lies to the northwest of continental Europe and is surrounded by hundreds of islands and islets. To the east of Ireland is Great Britain, separated from, New Zealand New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses , and numerous smaller islands, most notably Stewart Island/Rakiura and the Chatham Islands. The indigenous Māori language name for New Zealand is Aotearoa, commonly translated as The Land of the Long White Cloud. The Realm of New Zealand also, Austria Austria /ˈɒstriə/ or /ˈɔːstriə/ (German: Österreich (help·info)), officially the Republic of Austria (German: Republik Österreich), is a landlocked country of roughly 8.3 million people in Central Europe. It borders Germany and the Czech Republic to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and, Belgium Belgium (pronounced /ˈbɛldʒəm/ , BEL-jəm), officially the Kingdom of Belgium, is a country in northwest Europe. It is a founding member of the European Union and hosts its headquarters, as well as those of other major international organizations, including NATO. Belgium covers an area of 30,528 square kilometres (11,787 sq mi), and it has a, Denmark Denmark (pronounced /ˈdɛnmɑrk/ ; Danish: Danmark, pronounced [ˈd̥ænmɑɡ̊], archaic: [ˈd̥anmɑːɡ̊]) is a Scandinavian country in Northern Europe and the senior member of the Kingdom of Denmark. It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark borders, Finland Finland (pronounced /ˈfɪnlənd/ ), officially the Republic of Finland Finnish: Suomi; Swedish: Finland (help·info), is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden on the west, Norway on the north and Russia on the east, while Estonia lies to its south across the Gulf of Finland, France France (pronounced /ˈfrænts/ frantss or /ˈfrɑːnts/ frahnts; French pronunciation (help·info): [fʁɑ̃s]), officially the French Republic (French: République française, pronounced: [ʁepyblik fʁɑ̃sɛz]), is a state in Western Europe with several of its overseas territories and islands located on other continents and in the Indian, and the Netherlands The Netherlands (pronounced /ˈnɛðɚləndz/ ; Dutch: Nederland, pronounced [ˈneːdərlɑnt] ( listen)) is a constituent country of the Kingdom of the Netherlands, located in North-West Europe. It is a parliamentary democratic constitutional monarchy. The Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany. In some cases, these are small (the maximum EITC in Finland is 290 euros The euro is the official currency of the Eurozone: 16 of the 27 Member States of the European Union (EU) and is the currency used by the EU institutions. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is due to), but others are larger than the U.S. credit (the UK's working tax credit is worth up to £7782)^{[citation needed]}.

In the United States as of tax year 2006, some 20 states and the District of Columbia had their own EICs. These state plans generally mimic the federal structure on a smaller scale, with individuals receiving a state credit equal to a fixed percentage—generally between 15 and 30 percent—of what they are eligible to receive from the federal credit. A few small local EICs have been enacted in San Francisco The City and County of San Francisco is the fourth most populous city in California and the 12th most populous city in the United States, with a 2008 estimated population of 808,977. The only consolidated city-county in California, it encompasses a land area of 46.7 square miles on the northern end of the San Francisco Peninsula, giving it a, New York City New York is the most populous city in the United States, and the center of the New York metropolitan area, which is one of the most populous metropolitan areas in the world. A leading global city, New York exerts a powerful influence over global commerce, finance, media, culture, art, fashion, research, education, and entertainment. As host of the, and Montgomery County, Maryland Montgomery County is a county in the U.S. state of Maryland situated just north of Washington, D.C. and southwest of Baltimore. It is one of the most affluent counties in the nation, and has the highest percentage of residents over 25 years of age who hold post-graduate degrees. The county seat and largest municipality is Rockville. Most of the.

Earned income

Earned income is a technical term defined by the United States tax code The Internal Revenue Code is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes and statutory excise taxes. The Internal Revenue Code is published as Title 26 of the United States Code (USC), and. The following are the main sources:^[2]

• Wages A wage is a compensation, usually financial, received by workers in exchange for their labor, salaries A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis, tips, commissions, and other taxable employee pay,
• Net earnings from self-employment,
• Gross income received as a statutory employee,
• a minority of disability payments, and
• nontaxable combat pay which a member of the U.S. armed services elects to include solely for purposes of EIC calculation. The service member must include either all of the combat pay in this calculation or none of it.

Qualifying children

Age

If a person is classified as disabled, the age requirement is automatically met. The IRS uses the phrase "permanently and totally disabled." However, they go on to define this such that the person who is thus classified has a mental or physical disability, cannot engage in substantial gainful activity, and a physician has determined that the condition has lasted or is expected to last one year or more, or the condition leads to the person's death.

If a person is enrolled as a full-time student during some part of five calendar months, they can be up to and including age 23. For example, the standard Fall (Autumn) semester of a university in which classes start in late August and continue through September, October, November, and early December counts as part of five calendar months. A similar conclusion applies to the standard Spring semester. However, the five months need not be consecutive and can be obtained by any combination of shorter periods. Full-time status is often defined as ten semester hours, although the IRS defers to how each specific educational institution defines full-time status. Schools also includes technical and trade schools.

In all other cases, a person can be up to and including age 18 and can still count as a child for purposes of EIC.^[2]

Relationship

You must be related to your qualifying child, or children, through blood, marriage, or law. In addition, the child must be either in your same generation or a later generation. A foster child counts if officially placed by an agency, court, or American Indian tribal government. An adopted child counts and can be in the process of being adopted if lawfully placed. Thus, your qualifying child can be your daughter, son, stepdaughter, stepson, grandchild, great-grandchild, sister, brother, stepsister, stepbrother, half sister, half brother, niece, nephew, great niece, great nephew, or any further descendant of these related persons.^[2]

Shared residence

You must live with your qualifying child, or children, within the fifty states of the United States for more than half the tax year (six months and one day). Persons on active military duty are considered to be living within the United States. Temporary absences, for either you or the child, due to school, hospital stays, business trips, vacations, periods of military service, or jail or detention counts as time lived at home. "Temporary" is perhaps unavoidably vague and generally hinges or whether you or the child are expected to return, although the IRS is somewhat lenient and can count rather lengthy periods as temporary. Also, if the child was born or died in the year and your home was the child’s home for the entire time they were alive during the year, they count as if living with you for 12 months, and therefore satisfy this test.^[2]

Other requirements

Investment income cannot be greater than $3,100.

A claimant must be either a United States citizen or resident alien. In the case of married filing jointly where one spouse is and one isn't, the couple can elect to treat the nonresident spouse as resident and have their entire worldwide income subject to U.S. tax, and will then be eligible for EIC.

Filers both with and without qualifying children must have lived in the United States for more than half the tax year. Puerto Rico, American Samoa, the Northern Mariana Islands, and other U.S. territories do not count in this regard. A person on extended military duty is considered to have met this requirement for that period of time.

For persons without a qualifying child, there is an age requirement in that the person must be from age 25 to 64.

Persons without a qualifying child must themselves not be claimable as a dependent; persons with qualifying children must merely not be claimable as a qualifying child. This is a subtle distinction that sometimes plays out.

All filers (and children being claimed) must have a valid social security number. This includes social security cards printed with "Valid for work only with INS authorization" and "Valid for work only with DHS authorization."^[2]

For all filers, married filing separately acts as a disqualifying status and a person filing under that status will not be eligible for EIC. However, if the person has lived apart from their spouse for the last six months of the year, has jointly or individually paid more than half the cost of keeping up a main home (or several main homes) for six months for themselves and their qualifying child, and can claim that child as a dependent (or could claim, but are waiving the dependency to the other parent), the person can file as head of household and thus be eligible for EIC. Alternatively, if a person obtains a divorce by December 31, that will carry, since it is marital status on the last day of the year that controls for tax purposes. In addition, if a person is "legally separated" by December 31, that will also carry. [see 1040 Instructions]

EIC phases out by the greater of earned income or adjusted gross income.

Since the maximum $4716 EIC is significantly higher than the allowed investment income of $3,100, low income homes having an investment income between $3,101 and $4715 will actually lose money. For example, a couple that makes $14,912 and has an investment income of $3,101 will find that their investment income has actually cost them $1815 in after tax dollars.

The Government acknowledges that fraud occurs regularly through these parameters, and is increasing IRS auditing and awareness.

EIC Table, 2009

The credit is characterized by a three-stage structure that consists of phase-in, plateau, and phase-out.

The same data, in words: for a person with two qualifying children, the credit is equal to 40% of the first $12,570 of earned income, thus reaching a plateau of $5,028 and staying there until earnings increase beyond $16,420, at which point the credit begins to phase out at 21.06%, reaching zero as earnings pass $40,295. The dollar amounts are indexed annually for inflation.

For married filing jointly, the plateaus travel $5,000 further.

This table, and the graph below, might make it appear as though EITC moves smoothly. In actuality, the amount of the credit is given by an IRS table that divides earned income into fifty dollar increments from $1 to $43,279.

EIC Graph, 2006

Impact

The EITC is the largest poverty Poverty is the lack of basic human needs, such as clean water, nutrition, health care, education, clothing and shelter, because of the inability to afford them. This is also referred to as absolute poverty or destitution. Relative poverty is the condition of having fewer resources or less income than others within a society or country, or compared reduction program in the United States. Almost 21 million American families received more than $36 billion in refunds through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation’s lowest paid working people, lifting more than 5 million of these families above the federal poverty line.

Further, economists suggest that every increased dollar received by low and moderate-income families has a multiplier effect of between 1.5 to 2 times the original amount, in terms of its impact on the local economy and how much money is spent in and around the communities where these families live. Using the conservative estimate that for every $1 in EITC funds received, $1.50 ends up being spent locally, would mean that low income neighborhoods are effectively gaining as much as $18.4 billion.

The stimulus effects of the EITC and other consumption-augmenting policies have been challenged by more recent and rigorous studies. Haskell (2006) finds that the unique spending patterns of lump-sum tax credit recipients and the increasingly global supply chain for consumer goods is counter-productive to producing high, localized multipliers. He places the local multiplier effect somewhere in the range of 1.07 to 1.15, more in line with typical economic returns. The lower multiplier is due to recipients emphasizing "big-ticket" durable good purchases, which are typically produced elsewhere, versus locally-produced products and services such as agricultural products or restaurant visits. However, Haskell points to a silver lining: there are perhaps more important benefits from recipients who use the credit for savings or investment in big-ticket purchases that promote social mobility, such as automobiles, school tuition, or health-care services.^[3][4]

It is apparent that the EITC offers incentives to work more hours during the phase-in period, when individuals receive an increased tax credit the more hours they work. However, above the income thresholds of $14,400 for single parent families and $16,400 for two parent families, participants in the program have a diminished incentive to work. They receive less tax credit the more hours worked. Regression analysis shows a small but statistically significant negative coefficient. While the positive incentives of the phase-in period outweigh the negative incentives of the phase-out period; some economists argue that slight changes to the program and integration with other tax advantages, such as the child tax credit, can make it an even more effective work incentive.^[5]

Due to its structure, the EIC is effective at targeting assistance to low-income families. By contrast, only 30% of minimum wage A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers. Equivalently, it is the lowest wage at which workers may sell their labor. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about the benefits and drawbacks of a minimum wage workers live in families near or below the federal poverty line, as most are teenagers, young adults, students, or spouses supplementing their studies or family income.^[6][7] Opponents of the minimum wage argue that it is a less efficient means to help the poor than adjusting the EITC.

Cost

It is difficult to measure the cost of the EITC to the Federal Government. At the most basic level, federal revenues are decreased by the lower, and often negative, tax burden on the working poor for which the EITC is responsible. In this basic sense, the cost of the EITC to the Federal Government was more than $36 billion in 2004.

At the same time, however, this cost may be at least partially offset by several factors: 1) any new taxes (such as payroll taxes paid by employers) generated by new workers drawn by the EITC into the labor force, 2) any reductions in entitlement An entitlement is a guarantee of access to benefits based on established rights or by legislation. A "right" is itself an entitlement associated with a moral or social principle, such that an "entitlement" is a provision made in accordance with legal framework of a society. Typically, entitlements are laws based on concepts of spending that result from individuals being lifted out of poverty by the EITC (the poverty line is sometimes a watermark for eligibility for state and federal benefits), and 3) taxes generated on additional spending done by families receiving earned income tax credit.

Uncollected tax credits

Millions of American families who are eligible for the EITC do not receive it, leaving billions of additional tax credit dollars unclaimed. Research by the Government Accountability Office The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government (GAO) and Internal Revenue Service The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue. The IRS is responsible for collecting taxes and the interpretation and enforcement of the IRC (Internal Revenue Code) indicates that between 15% and 25% of households The household is "the basic residential unit in which economic production, consumption, inheritance, child rearing, and shelter are organized and carried out"; [the household] "may or may not be synonymous with family" who are entitled to the EITC do not claim their credit, or between 3.5 million and 7 million households.

The average EITC amount received per family in 2002 was $1,766. Using this figure and a 15% unclaimed rate would mean that low-wage workers and their families lost out on more than $6.5 billion, or more than $12 billion if the unclaimed rate is 25%.

Many nonprofit organizations around the United States, sometimes in partnership with government and with some public financing, have begun programs designed to increase EITC utilization by raising awareness of the credit and assisting with the filing of the relevant tax forms.

See also

• Taxation in the United States Taxation in the United States is a complex system which may involve payment to many different levels of government and many methods of taxation. United States taxation includes local government, possibly including one or more of municipal, township, district and county governments. It also includes regional entities such as school and utility, and
• Guaranteed minimum income The guaranteed minimum income is a proposed system of social welfare provision that guarantees that all citizens or families have an income sufficient to live on, provided they meet certain conditions. Eligibility is typically determined by citizenship, a means test and either availability for the labour market or a willingness to perform
• Negative income tax In economics, a negative income tax is a progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government. Such a system has been discussed by economists but never fully implemented. It was developed by British politician Juliet Rhys-Williams in the 1940

References

1. ^ ^{a b} Figures cited are from EITC Parameters 1975-2009, at the Tax Policy Center (Accessed January 26, 2007)
2. ^ ^{a b c d e f} IRS Publication 596, Earned Income Credit (EIC): For use in preparing 2008 Returns. Topics include social security cards on pp. 5-6 (pp. 7-8 in PDF file), definition of earned income on pp. 9-11, qualifying children pp. 12-19, and EIC table pp. 42-49.
3. ^ http://www.nashvilleafi.org/Files/ImpactStudy.pdf
4. ^ http://www.frbatlanta.org/invoke.cfm?objectid=97636FAC-5056-9F12-128E4F3C0244A481&method=display_body
5. ^ Trampe, Paul. "The EITC Disincentive: The Effects on Hours Worked from the Phase-out of the Earned Income Tax Credit" (Sep 2007). [1]
6. ^ Turner, Mark (2007-01-17). "The Low-Wage Labor Market". http://aspe.hhs.gov/hsp/lwlm99/turner.htm.
7. ^ "Characteristics of Minimum Wage Workers: 2005". Bureau of Labor Statistics, US Department of Labor. 2007-01-17. http://www.bls.gov/cps/minwage2005.htm.

External links

Taxpayer info/tools:

• IRS EITC Assistant, which can help determine if you qualify for EITC
• IRS 1040 Instructions, 2007, Earned Income Credit instructions on pages 44–50, table on pages 51–58.
• IRS Schedule EIC. Taxpayers claiming qualifying child(ren) need to include this form with their tax return.
• IRS Publication 596 - Earned Income Credit, a publication aimed at people who will potentially be claiming the credit.
• EITC Calculator, which can help estimate your credit amount.
• 2009 EIC Table, embedded pdf of the Earned Income Credit - IRS Publication 596 (Adobe Reader not required).

Organizations/campaigns:

• National Community Tax Coalition, an organization that supports the EITC and tries to help make sure people claim it
• Boston EITC Campaign

Background:

• Section 13 ("Tax Provisions Related to Retirement, Health, Poverty, Employment, Disability, and Other Social Issues") of the House Ways and Means Committee's Green Book provides historical information, including previous EITC parameters. (The version linked to here is the 2004 edition. Note: it's not published anuually.)

Policy Analysis:

• Congressional Budget Office report for Senate Finance Committee, on "the Effects of Increasing the Federal Minimum Wage Versus Expanding the Earned Income Tax Credit" (January 9, 2007)
• New Research Findings on the Effects of the Earned Income Tax Credit, Center on Budget and Policy Priorities, March 11, 1998
• The Earned Income Tax Credit (EITC): Percentage of Total Tax Returns and Credit Amount by State a Congressional Research Service (CRS) Report
• The Earned Income Tax Credit at Age 30: What We Know, Steve Holt, the Brookings Institution The Brookings Institution is a nonprofit, public policy organization based in Washington, D.C. One of Washington's oldest think tanks, Brookings conducts research and education in the social sciences, primarily in economics, metropolitan policy, governance, foreign policy, and global economy and development
• The Hidden Welfare State: Tax Expenditures and Social Policy in the United States, Christopher Howard, Princeton University Press, 1997. Mr. Howard discusses the mortgage interest deduction, employer pensions, EITC, and the targeted jobs tax credit as examples of tax expenditures.

Podcast:

• http://bostontaxhelp.libsyn.com/ Boston Tax Help podcast. Produced by Craig Far-Corporate/Community Partnerships/Boston EITC Campaign

Categories: Taxation in the United States Categories: Taxation by country | United States law | Government finances in the United States | Personal taxes | Tax credits

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• Society: Issues: Poverty: Welfare: Earned Income Tax Credit: Directory
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