FEDERAL TAX CREDITS FOR WORKING FAMILIES
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.
United Way feels so strongly about this issue that it leads a regional collaborative to promote the Earned Income Credit and to coordinate volunteers to prepare taxes for low income families. The collaborative is a coalition of businesses, nonprofits and government partners with a goal of helping eligible wage earners in Southwest Ohio, Northern Kentucky and Southeastern Indiana receive quality free tax preparation in person or online along with opportunities to file for the Earned Income Credit, Child Tax Credits, education credits, and tax benefits and incentives that help to strengthen financial stability.
The EITC initiative is just one way that United Way, with your support, fights for the health, education and financial stability of every person in our community. The EITC initiative has grown from $900,000 in 2003 to more than $20 million in tax refunds returned to local families and individuals this year. In 2017, approximately 16,970 households were served, saving $4.7 million in tax preparation fees. and more than 3,000 families received $4.8 million in Earned Income Tax Credit and Child Tax Credit payments.
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 to 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: