Nothing is more misunderstood than the Earned Income Tax Credit (EITC). Period. Here’s the deal: the EITC was initially designed to provide support for working parents – as any parent knows, there are PLENTY of costs associated with raising kids. As a result, workers without children, as a rule, can still qualify, but the actual credit is substantially less.
What is undeniable is that the EITC has helped to put more money on the pockets of the working class family than nearly any other program – tax or otherwise – in history. The result has been nearly 6.5 million people have been able to move above the so-called poverty line in the United States.
In essence, workers that qualify under the income guidelines then receive a credit equal to a percentage of their earnings up to a maximum credit. Both the credit rate and maximum credit vary by family size, with larger credits available to families with more children. After the credit reaches its maximum, it remains flat until earnings reach the phaseout point. Thereafter, it declines with each additional dollar of income until no credit is available.
Read that part again- “until no credit is available…”
That’s the important part – the EITC was designed to help low and moderate-income families to be able to have more on each paycheck, not only to help make ends meet, but also, in theory, to allow a parent to not have to go back to work in some cases. The EITC was never designed to help to upper middle classes, the ultra-wealthy, or anyone other than the working class. Make too much and you no longer qualify for the EITC, simple as that.
By design, the credit only benefits working families. Families with children receive a much larger credit than workers without qualifying children. In 2017, for example, the maximum credit for families with one child is $3,400, while the maximum credit for families with three or more children is $6,318.
In contrast to the substantial credit for workers with children, childless workers can receive a maximum credit of only $510. Moreover, the credit for childless workers phases out at much lower incomes. Also, childless workers must be at least 25 and not older than 64 to qualify for a subsidy—restrictions that do not apply to workers with children. As a result of these tighter rules, 97 percent of benefits from the credit go to families with children and the data supports that the overall effect of the EITC does put more money into worker’s pockets, presumably to help families with children. Every year (and this last one was no exception), Congress attempts to massage and change the rules with EITC, and as critical as it is for many of our own clients, we strongly encourage you, as a taxpayer, to stay abreast of the very real changes that could be made to your tax commitments as a result of changes to EITC.
Research shows that the EITC encourages single people and primary earners in married couples to work. The credit also appears to have little effect on the number of hours they work once employed, but personally? I love the fact that people are rewarded for working instead of sitting on the sidelines!
The good news, though? Once you understand the rules, EITC is easy to figure out. The bad news? A lot of that information is scattered all over the place, so I’d encourage you to simply come in and let’s discuss how the EITC can – or cannot – impact you.