Order Code RS21477
Updated June 9, 2003
CRS Report for Congress
Received through the CRS Web
The Earned Income Tax Credit (EITC):
Policy and Legislative Issues
Christine Scott
Specialist in Tax Economics
Domestic Social Policy Division
Summary
The Earned Income Tax Credit (EITC or EIC) began in 1975 as a temporary
program to return a portion of the social security taxes paid by lower income taxpayers,
and was made permanent in 1978. In the 1990s, the program became a major
component of federal efforts to reduce poverty, and is now the largest anti-poverty
entitlement program. Preliminary 2001 data show a total for the EITC of $32.5 billion
and 19.4 million recipients, yielding an average tax credit of $1,680. Most of the EITC
(83.7%) was received as a refund to low income workers.
Legislation has been introduced in the 108th Congress related to three policy issues
for the EITC: the marriage penalty (H.R. 210, H.R. 407, H.R. 1612, S. 96, S. 120, S.
135); family size adjustment (H.R. 936, H.R. 1782, and S. 448); and compliance (H.R.
22, H.R. 936, H.R. 1661, H.R. 1782, H.R. 1894, S. 448, S. 685, S. 755, S. 1173, S.
1174, and H.R. 1308 as amended by the Senate). This report will be updated as
legislative activity warrants.
The Earned Income Tax Credit (EITC)1
The EITC is a refundable tax credit available to eligible workers earning relatively
low wages. Under current law there are two categories of EITC recipients: childless
adults and families with children. Because the credit is refundable, an EITC recipient
need not owe taxes to receive the benefits. An EITC eligible family may also receive a
portion of the credit in the form of advanced payments. Eligibility for, and the size of,
the EITC is based on income, age, residence, and the presence of qualifying children.
1 A more detailed description of EITC eligibility and the calculation of the credit are in CRS
Report RL31768, The Earned Income Tax Credit (EITC): an Overview, by Christine Scott.
Congressional Research Service ˜ The Library of Congress

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Policy and Legislative Issues
Legislation has been introduced in the 108th Congress reflecting three policy issues
related to the EITC – marriage penalty, family size adjustment (anti-poverty
effectiveness), and compliance.
Marriage Penalty. In general, the EITC amount increases with earnings up to a
point (the maximum earned income eligible for the credit), then remains unchanged for
a certain bracket of income (the plateau), and then gradually decreases to zero as earnings
continue to increase (the phase-out range). This structure may, depending on the relative
income levels of both parties, impose a “marriage penalty” on single low income parents
if they choose to marry. The “marriage penalty” is the difference between the tax liability
for a married couple (filing a joint tax return) and the sum of the tax liabilities for each
person if they each filed using the single filing status. Two examples of the marriage
penalty are:
! Example 1. In tax year 2002 two single parents, each with one child and
earned income of $15,000 would receive an EITC of $2,265 each for a
total of $4,530. If they marry, their combined income is $30,000, and
with two children, the EITC is $875. The EITC marriage penalty for the
couple is $3,655.
! Example 2. In tax year 2002, a single parent with one child and income
of $15,000 would receive EITC of $2,265. If this single parent marries
an individual with no children and $15,000 of income, their combined
income is $30,000, and with one child the EITC is $28. The EITC
marriage penalty for the couple is $2,237.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L.
107-16) began reducing the marriage penalty by increasing the phase-out income level for
married couples by $1,000 in tax years 2002 through 2004, $2,000 for tax years 2005
through 2007, and by $3,000 in tax years 2008 and later. The EGTRRA provisions for
marriage penalty relief will sunset at the end of 2010. EGTRRA reduced the marriage
penalty for the couple in the first example by $210 in 2002, for the couple in the second
example by $28.
Whether a family has a marriage penalty will depend upon the particular
circumstances of the family including the number of earners (one earner or two earners).
For example, a non-working single parent with one child would not receive an EITC
because the parent has no earnings. If the parent marries an individual with $15,000 in
income, the married couple would have an EITC of $2,265. In this case there is a
“marriage bonus”.
In the 108th Congress, S. 120 and S. 135 would provide acceleration of the marriage
penalty relief provisions of EGTRRA, and eliminate the sunset for the marriage penalty
provisions. H.R. 210, H.R. 407, H.R. 1612, and S. 96 would eliminate the sunset for the
marriage penalty provisions
Family Size Adjustment (Anti-Poverty Effectiveness). While the EITC is
available at incomes above the federal poverty levels, to the extent the EITC is an anti-
poverty program, one goal may be to keep families above the poverty level. The structure

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of the EITC with respect to family size has not changed since 1990, with the categories
for family size being one child or two or more children. While benefits for most poverty
related programs are related to family size, the family size adjustment for the EITC is
capped at two children. As a result, a low income family with two children may remain
above the poverty level because of the EITC, while families with three or more children
at the same income level and EITC may slip below the poverty level. An example for tax
year 2002 is shown in Table 1.
Table 1. Impact of Family Size on Net Income after Taxes
Relative to Poverty Level, 2002
Family 1
Family 2
Family 3
two adults,
two adults,
two adults,
two children
three children
four children
Income
20,000
20,000
20,000
Federal tax before credits
15
0
0
Child credit (regular credit
limited to tax before credits)
15
0
0
EITC
(2,981)
(2,981)
(2,981)
Additional child credit
(965)
(965)
(965)
(refundable portion of credit)
Net tax
(3,946)
(3,946)
(3,946)
Payroll tax
1,530
1,530
1,530
Net income after tax
22,416
22,416
22,416
Poverty level (*)
18,244
21,469
24,038
Net income after tax as a
122.9%
104.4%
93.3%
percent of poverty level
Source: Table prepared by the Congressional Research Service.
Note: (*) The official poverty level for 2002 is not yet available, this is an estimate based on poverty
thresholds in 2001.
In the 108th Congress, H.R. 936, S. 448 would create a new category for the EITC
related to family size for families with three or more children.
Compliance
Compliance with the EITC provisions has been an issue for the program since 1990,
when the Internal Revenue Service (IRS), as part of the Taxpayer Compliance
Measurement Program (TCMP), released a study on 1985 tax year returns with the EITC.
The study concluded that there was an over-claim rate of 39.1%. The over-claim rate
represents the percentage of claimed EITC that was invalid. Some of these over-claims
were recovered after the study by IRS collection efforts. Later studies by the IRS have

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resulted in lower over-claim rates. The 1997 and 1999 tax return studies2 estimated that
the unrecovered over-claim rates were 23.8% to 25.6%, and 27.0% to 31.7%. These
studies presented the rates as upper– and lower-bound estimates because a number of
individuals contacted as part of the study did not respond. The lower bound assumes that
the over-claim rate for the nonrespondents is the same as for respondents, while the upper
bound assumes that all the nonrespondents are over-claims.
In the 1999 study, 24.9% of over-claims (with errors known) were due to the child
claimed not being the tax filer’s qualified child. The most common qualifying child error
was that the child did not meet the residency test which was 6 months in the case of
certain blood relatives, or 1 year for other individuals. The second most common was the
child not meeting the relationship test, particularly in the case of foster children where the
child did not live with the tax filers for the full year or was not cared for as the tax filer’s
own child.
The FY2004 budget request for the Internal Revenue Service (IRS) contains
additional funds ($100 million) for a new EITC compliance initiative that would establish
a pre-certification process for EITC claimants. This pre-certification initiative, to begin
in 2003, would select tax filers for whom the qualifying child’s relationship or residency
requirements could not be verified using existing data resources, and is estimated to
involve 45,000 tax filers in 2003 and up to 2 million in 2004. These tax filers will be
asked to provide documentation on the qualifying child’s relationship and residency prior
to filing their annual tax return.
Currently, if the qualifying child’s relationship or residence cannot be verified with
existing data resources for a return claiming the EITC, the return is selected for audit and
the tax refund is not paid until the audit is completed. If a tax filer has been pre-certified
for the qualifying child’s relationship or residence, the tax refund would not be held on
audit for this reason (a return may be audited for other reasons). In essence, the IRS
performs the audit before the tax return is filed rather than after the tax return is filed.
In the 108th Congress, H.R. 1894 would prohibit the IRS from implementing a pre-
certification program that is not authorized in law.
EGTRRA expanded the EITC definition of a qualifying child to include certain
relatives related by blood (nephews, nieces, step-nephews, step-nieces, and descendants
of such relatives cared for as the taxpayer’s own child) or marriage (step-grandchildren),
and eliminated the residence requirement for foster children. EGTRRA also provided
new tie-breaker rules (rules for when more than one person can claim a child):
! If one party is the child’s parent, the parent claims the child for the EITC.
! If neither party is the child’s parent, the party with the highest adjusted
gross income for the tax year claims the child for the EITC.
! If both parties are the child’s parents, the parent the child resided with
longer during the tax year claims the child for the EITC.
2 Internal Revenue Service, Department of the Treasury, “Compliance Estimates for Earned
Income Tax Credit Claimed on 1999 Returns,” Feb. 28, 2002, p. 18.

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! If the child resided with both parents for the same amount of time during
the tax year, the parent with the highest adjusted gross income claims the
child for the EITC.
These changes, particularly the tie-breaker rules may help in the future to reduce
problems with a qualifying child. However, the general rate of over-claims has not
changed significantly since 1990.
The definition of a child for purposes of the EITC is different from the requirements
to claim a child as a dependent for the personal exemption. In general, for the personal
exemption and the child credit, a dependent must have more than half of the support
provided by the taxpayer, and to be considered a child of the taxpayer, the dependent must
be a son, daughter, stepson, or stepdaughter of the taxpayer, and be under age 19 (24 if
a student).3 As a result of the difference in requirements for the personal exemption and
EITC, a single parent living in a multi-generational household may be able to claim the
child for the EITC, while the grandparent or the child’s nonresident parent may be able
to claim the child for the personal exemption and child credit.
To reduce the complexity created by the different definitions of a child, proposals
have been made by both the U.S. Department of the Treasury and the Joint Committee on
Taxation to conform the definition of a child for purposes of the personal exemption,
child credit, EITC, dependent care, and head of household filing status. In the 108th
Congress, H.R. 22, H.R. 936, S. 448, S. 755, S. 1173, S. 1174, and H.R. 1308 as amended
by the Senate, would provide uniformity in the definition of a child.
In addition to complexity with respect to the definition of a child, there are problems
for some married individuals. Under current law married taxpayers must file a joint
return to be eligible for the EITC. Certain married individuals are unable or unwilling to
file a joint return, creating difficulties for the other married partner in claiming the EITC.
H.R. 1661 and H.R. 1782 would alter the EITC requirements to permit married
individuals in certain circumstances to be considered unmarried for EITC purposes.
H.R. 1661 would also exclude from the calculation of a taxpayer’s earned income
any income exempt from tax because it is derived from: (1) activity related to fishing
rights secured by treaty; (2) restricted or allocated land under the Indian General
Allotment Act; or (3) land held under Acts or treaties with an exception provision similar
to the Indian General Allotment Act. The bill also eliminates the investment income
limitation for the EITC and contains language that may prevent pre-certification of the
EITC.
According to the National Taxpayer Advocate,4 in the 2000 processing year, paid tax
preparers filed 44% of the paper returns and 82% of the electronic returns claiming an
3 Depending on the relationship to the taxpayer, a child may also have to meet certain residence,
income, and citizenship tests.
4 National Taxpayer Advocate, Internal Revenue Service, Department of the Treasury, FY2002
Annual Report to Congress, p. 70.

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EITC. A study by the Consumer Federation of America5 estimates that $994 million of
the EITC is spent on tax preparation, electronic filing, check cashing, and refund
anticipation loan fees. This estimate is based on fees of $85 for tax preparation, $40 for
electronic filing, $67 for check cashing, and $75 for a refund anticipation loan.
There are a number of reasons why EITC recipients may use paid preparers
including:
! language difference;
! literacy problems;
! IRS’s close review of EITC returns;
! less effort (work) by the tax filer;
! the belief that use of a pair preparer prevents errors; and
! the belief that refunds are received faster.
The use of electronic filing will result in a faster refund, other things being equal, but
use of a paid tax preparer does not necessarily result in fewer errors. In the 2000
processing year, of the EITC returns selected for examination (based on probability rules
that the return contains unallowable or misreported items), 66.9% were done by paid tax
preparers.
H.R. 1661 also provides a provision that would impact the use of refund anticipation
loans by taxpayers claiming the EITC. The bill prohibits the Secretary of the Treasury
from providing a direct deposit indicator6 for any taxpayer to a tax return preparer,
financial institution, or any other entity that charges the taxpayer interest rates, including
fees, on refund anticipation loans that is higher than the consumer loan usury rate limit
in the taxpayer’s home state. S. 685 provides for registration of tax preparers and refund
anticipation loan providers by the Secretary of the Treasury, with penalties for non-
compliance with the registration requirement.
The Budget Resolution
The House and Senate have agreed to the conference report on the budget resolution
which contains a provision which may impact the EITC in the future. H.Con.Res. 95.
provides that most committees submit to the Budget Committee chairmen by September
2, 2003 recommendations which would target waste, fraud, and abuse to reduce the direct
(mandatory or entitlement) spending under the committee’s jurisdiction to by levels to be
specified by the Budget Committee chairmen by May 16, 2003. These recommendations
are to be used for development of future budget resolutions.
5 Consumer Federation of America and the National Consumer Law Center, “Tax Preparers
Peddle High Priced Tax Refund Loans: Millions Skimmed From the Working Poor and the U.S.
Treasury,” Jan. 31, 2002, p.10.
6 The direct deposit indicator is a flag for taxpayers with outstanding liabilities which are part of
the tax intercept program such as child support and federal or state income taxes.

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