Individuals and families have greater incentives to work and increased financial stability thanks to the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). In December 2015, Congress voted to make permanent some expansions in these programs.
- The Earned Income Tax Credit (EITC), sometimes called the Earned Income Credit (EIC), is a federal income tax credit for low- to moderate-income working individuals and families. Congress originally approved the tax credit in 1975 to offset social security taxes and to provide an incentive to work. The amount of the credit depends on income, marital status and number of children.
- The Child Tax Credit (CTC), first enacted in 1997, provides a per child benefit for low- to moderate- income parents to offset some costs of raising a family. The refundable portion of the credit is calculated as 15% of earned income above a minimum (currently $3,000) to a maximum credit of $1,000 per child.
HOW DO THESE CREDITS HELP THE COMMUNITY?
These credits are two of the nation’s most effective pro-work, anti-poverty policies with long lasting impact for families and children. The Earned Income Credit has been shown to lift labor force participation rates among parents. It encourages earned income, financial independence and saving for hard- working households, growing financial assets that are important steps toward financial stability.
Together, the EITC and CTC lift 5 million children out of poverty. Studies show long term improvements in employment, education and health outcomes for children whose parents receive the Earned Income Tax Credit. These credits also pump billions of dollars back into local economies. Cincinnati area surveys show that local tax payers receiving credits and refunds anticipated spending the money for bills, debts, school, child care expenses, medical bills, and groceries. The credits have a multiplier effect: every $1 paid in EITC generates $1.50 – $2 in local economic activity.
EITC Advocacy Request: Tax Credits for Working Americans
The Earned Income Tax Credit (EITC) is a refundable federal tax credit for lower income working people that encourages and rewards work, offsetting federal payroll and income taxes. The amount of the EITC depends on a recipient’s income, marital status, and number of children. The EITC is broadly considered our nation’s most effective pro-work, anti-poverty tool. Only those who work are eligible, allowing them to keep more of what they earn to pay for things like transportation to get to work and childcare. The Child Tax Credit (CTC) is similarly structured, and together these critical credits bring back billions of dollars to local communities, supporting local economies.
Currently, lower-income working Americans not raising children at home access little tor no EITC. Young people age 21-24 are also ineligible. So, while the EITC is one of the most effective tools we have to help working families keep their heads above water, it excludes millions of workers.
Congress can build on this common-sense policy by increasing the size of the EITC for workers not raising children at home and lowering the age of eligibility to 21 to enable young people just starting out to have greater stability entering the workforce. Congress should also protect the EITC and CTC in tax reform conversations to ensure these tools continue to effectively reward work and build strong families and communities.
VITA Advocacy Request: Build on What Works
Through the Community Volunteer Income Tax Assistance Program (VITA), volunteers become IRS-certified tax preparers and provide qualifying individuals and families with free, reliable assistance in filing federal tax returns. Most taxpayers utilizing VITA earn an annual household income of less than $40,000 and come from traditionally hard-to-reach and underserved communities, including people with disabilities, the elderly, and Native Americans. VITA helps hardworking Americans meet their tax obligations while claiming the full amount of any refunds for which they are eligible.
During the 2017 filing season, thousands of VITA volunteers prepared millions of tax returns nationwide. Returns filed through free tax preparation resulted in more than $2.2 billion returning to local communities in 2017 – dollars spent to cover child expenses, pay bills, purchase groceries and household necessities, as well as to save for the future. The local dollars are made possible largely thanks to tax credits that successfully incentivize and reward work.
Limited federal funding for Community VITA began with a demonstration VITA Grant in 2008. The Fiscal Year 2017 appropriation of $15 million represents only a fraction of the cost of operating Community VITA tax sites nationwide. While the tax returns are prepared by volunteers, sponsoring community organizations contribute significant resources to recruit and train the volunteers to IRS standards, supervise the volunteers to ensure accuracy, provide office space and computers for electronic filing, and conduct outreach to community members.
Demand for VITA services continues to grow. Given the significant return on investment in this successful partnership, a relatively small boost in funding from Congress can go a long way in enabling more constituents to access this proven resource.
United Way urges Congress to continue to support this successful public-private partnership by:
- Shoring up investments in the Community VITA Grant Program to $30 million dollars.
- Formally authorizing the Community VITA Grant Program through the VITA Act.
Federal Advocacy Links:
- Center for Budget Policy
- Corporation for Enterprise Development (CFED)
- United Way of Greater Cincinnati Advocacy Link
STATE TAX CREDITS
Ohio created a state Earned Income Tax Credit in 2013 and expanded it in 2014. The credit is benchmarked at 10% of the Federal EITC. However, Ohio is one of only four states that have non-refundable EITCs.
The federal EITC, and the EITC in most other states with a credit, is refundable to make up for the fact that poor families pay more in other state and local taxes. When the credit is refundable, families who earn too little to pay income tax (but still pay a disproportionate share of other state and local taxes) still see the full value of their refund. The fact that the Ohio credit is not refundable severely limits its ability to keep families out of poverty.
In addition to being nonrefundable, for the majority of eligible filers, the tax credit is further reduced by a benefit cap. For Ohio filers with taxable incomes that exceed $20,000, the EITC is capped at 50 percent of the tax that would be due after the deduction of all other credits. This cap on the state credit hurts families who could use the full aid of the EITC.
Kentucky does not currently have an Earned Income Credit. An effort is underway to get the Kentucky General Assembly to enact a state earned income tax credit to supplement the federal EITC. You can help by urging your client and staff networks to fill out this survey: (EITC Survey) and returning them Mike Hammons, Director of Advocacy, Children, Inc.
State Advocacy Links: