Order Code RL31768
The Earned Income Tax Credit (EITC):
An Overview
Updated March 15, 2007
Christine Scott
Specialist in Tax Economics
Domestic Social Policy Division

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The Earned Income Tax Credit (EITC): An Overview
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. Childless adults in 2004 received an average EITC of
$218, families with one child received an average EITC of $1,728, and families with
two or more children received an average EITC of $2,669.
A low-income worker must file an annual income tax return to receive the EITC
and meet certain requirements for income and age. A tax filer cannot be a dependent
of another tax filer and must be a resident of the United States unless overseas
because of military duty. The EITC is based on income and whether the tax filer has
a qualifying child.
The EITC interacts with several nonrefundable federal tax credits to the extent
lower income workers can utilize the credits to reduce tax liability before the EITC.
Income from the credit is not used to determine eligibility or benefits for means
tested programs. However, 18 states and the District of Columbia now offer an EITC
for state taxes, and most of them are based on the federal EITC. Any change in the
federal EITC would flow down to impact the state EITC.
Policy issues for the EITC, which reflect either the structure, impact, or
administration of the credit include the work incentive effects of the credit; the
marriage penalty for couples filing joint tax returns; the anti-poverty effectiveness of
the credit (primarily a family size issue); and potential abuse (i.e., compliance with
credit law and regulations).
The National Taxpayer Advocate heads an independent program within the
Internal Revenue Service (IRS) to handle taxpayer problems not resolved through
normal channels, and to identify issues that create problems for taxpayers. As part
of identifying problems for taxpayers, the National Taxpayer Advocate prepares a
report each year to Congress summarizing at least 20 of the most serious problems
faced by taxpayers with recommendations to resolve the problems. In the reports for
2002 through 2005, EITC related problems have been included among the “most
serious problems.” In the 2006 report, while the EITC was not listed as a specific
problem, concerns about the EITC and low-income taxpayers are components of
some of the “more serious problems.” This report will be updated annually.

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Contents
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Families with Children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Childless Adults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Credit Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Calculation of EITC Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Indexing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Marginal Tax Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Characteristics of Tax Year 2004 EITC Tax Returns . . . . . . . . . . . . . . . . . 10
Number of Children . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Filing Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Geographic Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Interaction With Other Tax Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Federal Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Means Tested Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
State EITC Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Work Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Marriage Penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Anti-Poverty Effectiveness (Family Size) . . . . . . . . . . . . . . . . . . . . . . 15
Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
National Taxpayer Advocate’s “Most Serious Problems” . . . . . . . . . . . . . . 18
Appendix 1. Legislative History of the EITC . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Work Bonus Plan (1972-1974 Proposals) . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Enactment of EITC in 1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Extensions of EITC (1975-1977 Laws) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Permanent Status for EITC and Rise in Maximum Credit (1978 Law) . . . . 20
Rise in Maximum Credit (1984 Law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Indexation of EITC and Rise in Maximum Credit (1986 Law) . . . . . . . . . . 21
Rise in Maximum Credit and Establishment of Family-Size
Adjustment and Supplemental Credits (1990 Law) . . . . . . . . . . . . . . . 21
Basic EITC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Supplemental Young Child Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Supplemental Health Insurance Credit . . . . . . . . . . . . . . . . . . . . . . . . 22
Expansion of Credits, Coverage of Childless Adults, and Repeal of
Supplemental Credits (1993 Law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Credit for Families . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Extension of EITC to Childless Households . . . . . . . . . . . . . . . . . . . . 23
Coverage of Overseas Military Personnel (1994 Law) . . . . . . . . . . . . . . . . 23
Eligibility Limit Based on Investment Income (1995 Law) . . . . . . . . . . . . . 24
Revisions of EITC in the Welfare Reform Bill (1996 Law) . . . . . . . . . . . . 24
Deny EITC to Undocumented Workers . . . . . . . . . . . . . . . . . . . . . . . . 24
Disqualified Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Broaden Income Used in EITC Phase-out . . . . . . . . . . . . . . . . . . . . . . 24
Allow State Welfare Programs to Count EITC . . . . . . . . . . . . . . . . . . 25
Denying Credit Based on Prior Claims (1997 Laws) . . . . . . . . . . . . . . . . . . 25

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Reduction of Marriage Penalty and Simplification of the EITC
(2001 Law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Uniform Definition of a Child and Combat Pay (2004 Law) . . . . . . . . . . . 25
Hurricane Relief (2005 Law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Extension of Combat Pay & Hurricane Relief (2005 Law) . . . . . . . . . . . . . 26
Appendix 2. History of the EITC Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . 27
List of Figures
Figure 1. EITC Levels by Income, Single Parent Family with One Child,
Tax Year 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Figure 2. Statutory and Marginal Tax Rates, Single Parent Family with One
Child, Tax Year 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. EITC Parameters for Tax Years 2005-2007 . . . . . . . . . . . . . . . . . . . . . . 5
Table 2. EITC and Recipients 1975-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 3. Percent Distribution of Returns and Total EITC by Number of
Children, Tax Year 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 4. EITC by Number of Children, Tax Year 2004 . . . . . . . . . . . . . . . . . . . 11
Table 5. Percent Distribution of Returns and Total EITC by Tax Filing
Status, Tax Year 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 6. Federal EITC Recipients and EITC Amount By State, Tax Year
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 7. Impact of Family Size on Net Income after Taxes Relative to
Poverty Level, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table 8. EITC Parameters, 1975-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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The Earned Income Tax Credit (EITC):
An Overview
The Earned Income Tax Credit (EITC) program began in 1975 as a temporary
and small (6.2 million recipients) program to reduce the tax burden on working low-
income families. The program has grown into the largest federal anti-poverty
program with 22.3 million tax filers receiving $40.6 billion in tax credits for tax year
2004. Appendix 1 outlines the history of the EITC and Appendix 2 shows how the
parameters for calculating the EITC have changed since the original enactment in
1975.
Eligibility
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.
Families with Children. For a family to receive the EITC, the family must
have adjusted gross income (AGI) and earned income below the amount which
reduces the EITC to $0, and have investment income no greater than $2,200 (indexed
for inflation). Investment income includes interest income (including tax-exempt
interest), dividends, net rent and royalties that are from sources other than the filer’s
ordinary business activity, net capital gains, and net passive income.
Earned income includes wages, tips, and other compensation included in gross
income and self-employment income after the deduction for self-employment taxes.
Earned income does not include pension or annuity income; income for nonresident
aliens not from a U.S. business; income earned while incarcerated (for work in
prison); and to the extent subsidized, earnings from a mandatory state work program.
The family must reside in the United States unless in another country because
of U.S. military duty. For tax year 2004, the child (or children) had to meet three
requirements for a qualifying child:
! relationship — the child must be: a son, daughter or descendant of
such (grandchild); a brother, sister, or descendent of such (niece or
nephew) cared for by the taxpayer; or foster child;
! residence — the child must live with the taxpayer for more than half
the year; and

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CRS-2
! age — the child must be under age 19 (or age 24, if a full-time
student) or be permanently and totally disabled.
If a child qualified for more than one tax filer, the natural parent claimed the
child. If the natural parent was not one of the tax filers, the tax filer with the highest
AGI claimed the child for the EITC. If both tax filers were natural parents, the parent
the child resided the longest with during the tax year claimed the child. If the child
resided with each parent for the same period of time, the filer with the larger AGI had
to claim the child.1
Beginning in tax year 2005, the EITC, along with other tax provisions used by
families (child tax credit, head of household filing status, and dependent care tax
provisions) became linked to a more uniform definition of a child under the personal
exemption tax provision changes made by the Working Families Tax Relief Act of
2004 (P.L. 108-311). The definition of a child and the rules for when more than one
party may claim a child for these tax provisions are the same as the rules for the EITC
in tax year 2004. However, the interaction between the new definitions of a
qualifying child and a qualifying relative may impact who could claim a child under
various tax provisions.
Another change made by P.L. 108-311 affected families in which the taxpayer
or spouse is in the military. Although gross income for tax purposes does not
generally included certain combat pay earned by members of the armed forces, P.L.
108-311 allowed members of the armed forces to include combat pay for purposes
of computing the earned income credit for tax years that ended after October 4, 2004,
and before January 1, 2006 (generally tax years 2004 and 2005). The Gulf
Opportunity Zone Act of 2005 (P.L. 109-135) extended the option to include combat
pay for calculating the credit for another year (tax year 2006, or tax years ending
before January 1, 2007).
The Katrina Emergency Relief Act (P.L. 109-73) provided that taxpayers
affected by Hurricane Katrina may use their tax year 2004 earned income to compute
their 2005 EITC. P.L. 109-135 also extended the option of using 2004 income to
compute 2005 EITC to taxpayers affected by Hurricane Rita, and clarified that to use
this election, the taxpayer’s 2005 income had to be less than the taxpayer’s 2004
income.
Childless Adults. Childless adults must reside in the United States unless in
another country because of U.S. military duty. A childless adult must be at least 25
years of age, but not more than 64 years of age to be eligible for the EITC, and cannot
be claimed as a dependent on another person’s tax return. Childless adults may
include married couples if both persons meet eligibility requirements. Eligibility is
1 An eligibility rule that an unmarried filer must meet the requirements for “head of
household” tax filer status to be eligible for the EITC was dropped by Omnibus Budget
Reconciliation Act (OBRA) of 1990. This status was difficult for many low-income
working mothers to meet since many of them received more than half their cash income
from AFDC, which is not regarded as self-support income by the IRS in determining “head
of household” status.

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CRS-3
restricted to those with both earnings and AGI below the income amount which
reduces the EITC to $0, and investment income (as defined above) not in excess of
$2,200 (indexed for inflation).
Credit Amount
Calculation of EITC Amount. Claimants receive an EITC in one of four
ways:
! as a reduction in income tax liability;
! as a year-end cash payment from the Treasury if the family has no
income tax liability;
! as a combination of reduced taxes and direct payments; or
! as advance payments by adjusting withholding.2
To receive an EITC, a person must file an income tax return at the end of the tax
year, together with a separate schedule (Schedule EIC) if claiming a qualifying child.
An eligibility certificate (Form W-5) must be filed with the employer to receive
advance credits through the employer’s payroll.
If the family (or childless adult) is eligible for the credit, the credit is based on
the credit rate, which varies with the number of children, and the earned income. Up
to the maximum earned income amount, the credit equals the earned income times
the credit rate. During this phase-in period for the credit, for each additional $1 of
earned income the recipient receives an additional credit equal to the credit rate. For
example, in tax year 2007 for a family with one child, for each additional $1 of
earnings (up to a total earned income of $8,390) the family receives an additional 34
cents in EITC.
For earned income between the maximum earned income amount and the phase-
out income level, the EITC is constant at the maximum credit. Above the phase-out
income level, for each additional $1 of income the recipient loses credit at the phase-
out rate. In tax year 2007, for a family with one child, for each $1 of income above
the phase-out level of income ($17,390 for married couples, $15,390 for others), the
recipient loses 15.98 cents of EITC. Graphically, the phase-in period for the credit
is steeper than the phase-out period because the credit is increased faster during the
phase-in than the credit is reduced during the phase-out.
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 (beginning at the phase-out income
level) gradually decreases to zero as earnings continue to increase. Figure 1 provides
a graphic representation of EITC levels, by income level for a single parent family
with one child.
2 Childless adults cannot receive the EITC through advance payments.

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CRS-4
Figure 1. EITC Levels by Income, Single Parent Family
with One Child, Tax Year 2007
$4,000
$3,000
Max
EITC $2,000
EITC
Phase-
out of
$1,000
EITC
$0
$0
$5,00 $1
$
$
$
$
$
0
15,
2
25
30,00
35
,00
0,00
,00
,00
0
0
0
00
0
0
0
0
Income
Source: Figure prepared by the Congressional Research Service (CRS).
The parameters for calculating the EITC (credit rates, phase-out rates, maximum
earned income amount, maximum credit amount, phase-out income level, and
disqualifying investment income level) for tax years 2005, 2006 and 2007 are shown
in Table 1.
The EITC is taken against total tax liability (regular, alternative minimum, and
self-employment taxes) after several nonrefundable tax credits. Because the EITC
is a refundable credit, on the tax return the line for the EITC can be found in the
payment section after the lines for withholding and estimated tax payments. The
individual income tax return booklet presents the EITC amounts in tables by income
brackets (in $50 increments). This allows a tax filer to look up the correct amount
of the EITC based on income, filing status, and number of children.

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CRS-5
Table 1. EITC Parameters for Tax Years 2005-2007
Phase-
Credit
2005
2006
2007
Out
Rate
Rate
No children
—
—
—
7.65%
7.65%
Maximum earned income amount
$5,220
$5,380
$5,590
—
—
Maximum credit
$399
$412
$428
—
—
Phase-out income level
$6,530
$6,740
$7,000
—
—
Phase-out income level for
married filing joint
$8,530
$8,740
$9,000
—
—
Income where EITC = $0
$11,750
$12,120
$12,590
—
—
Income where EITC=$0 for
married filing joint
$13,750
$14,120
$14,590
—
—
One child
—
—
—
34.00%
15.98%
Maximum earned income amount
$7,830
$8,080
$8,390
—
—
Maximum credit
$2,662
$2,747
$2,853
—
—
Phase-out income level
$14,370
$14,810
$15,390
—
—
Phase-out income level for married
filing joint
$16,370
$16,810
$17,390
—
—
Income where EITC = $0
$31,030
$32,001
$33,241
—
—
Income where EITC=$0 for
married filing joint
$33,030
$34,001
$35,241
—
—
Two or more children
—
—
—
40.00%
21.06%
Maximum earned income amount
$11,000
$11,340
$11,790
—
—
Maximum credit
$4,400
$4,536
$4,716
—
—
Phase-out income level
$14,370
$14,810
$15,390
—
—
Phase-out income level for married
filing joint
$16,370
$16,810
$17,390
—
—
Income where EITC = $0
$35,263
$36,348
$37,783
—
—
Income where EITC=$0 for
married filing joint
$37,263
$38,348
$39,783
—
—
Disqualifying investment income
level
$2,700
$2,800
$2,900
—
—
Source: Table prepared by the Congressional Research Service (CRS).
Notes: To reflect the statutory language for calculating the inflation adjusted EITC parameters, the
maximum earned income amount and the phase-out income level are rounded to the nearest $10,
whereas the disqualifying income level is rounded to the nearest $50. In preparing their tax returns,
tax filers will use a table with $50 increments of income to look up their EITC amount.

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CRS-6
A formula presentation of the EITC calculation follows (where category reflects
EITC factors based on the number of children and filing status as in Table 1, and
adjusted gross income (AGI) is equal to gross income from all taxable sources such
as earned income, dividends, taxable interest, alimony, capital gains, taxable
pensions, etc. less statutory adjustments).
EITC =
Lesser of: earned income or maximum earnings amount category
times
credit ratecategory
minus
Greater of 0 or [earned income (or AGI whichever is larger) minus phase-out
income level
times phase-out rate
]
category
category
The following three examples for a married couple with 2 children in tax year
2007, illustrate how the EITC is calculated.
Example 1. For a family receiving less than the maximum allowable credit, with
earned income and AGI of $10,000 (which is less than the maximum earned income
amount):
EITC = $10,000 times 40% = $4,000
Example 2. For a family receiving the maximum allowable with earned income and
AGI of $16,000 (which is greater than the maximum earned income amount but less
than the phase-out income level):
EITC= $11,790 (the maximum earned income amount) times 40%
= $4,716 (the maximum credit)
Example 3. For a family subject to the phase-out of EITC with earned income and
AGI of $20,000 (which is greater than the maximum earned income amount and the
phase-out income level):
EITC = $11,790 (the maximum earned income amount) times 40%
or $4,716 (the maximum credit)
minus
($2,610 (the amount by which income exceeds the phase-
out income level[$17,390] times 21.06%)
or $550
= $4,166

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CRS-7
Indexing. With everything else held constant, when inflation increases
income, taxes increase. In periods of high inflation, this may result in increases in
taxes which many view as a windfall to the government. To reduce the impact of
inflation on taxes certain tax provisions, such as the personal exemption amount, are
increased each year by the rate of inflation. The Tax Reform Act of 1986 (P.L. 99-
514) began indexing of the maximum earned income and the phase-out income levels
for the EITC. The structure of the EITC combined with indexing results in the
largest annual percentage increases in EITC going to higher income EITC eligible
taxpayers. The effect of indexing on the EITC between year 1 and year 2 can be
defined for four groups of taxpayers:
! Tax filers below the year 1 maximum earned income level will have
no increase in the EITC between year 1 and year 2.
! Tax filers above the year 1 maximum earned income amounts and
below the year 1 phase-out income level will have an increase in
EITC equal to the change in the maximum credit amount (the credit
rate times the change in the maximum earned income).
! Tax filers above the year 1 phase-out income amount but below the
year 2 phase-out income amount, will have an increase in EITC
equal to the change in the maximum credit plus the year 1 phase-out
reduction in the EITC (the amount by which their year 1 income
exceeded the year 1 phase-out income times the phase-out rate).
! Tax filers above the year 2 phase-out income level, will have a
change in the EITC that is fixed at every income level until the end
of the phase-out range. The change is calculated as:
Change in EITC (above phase-out income level)=
Change in Maximum Credit
plus
Change in Phase-out Income Level x Phase-out Rate
Marginal Tax Rates. Marginal tax rates reflect the additional tax paid for
each additional $1 of income earned (or subject to tax). Economic theory suggests
that the higher the marginal tax rate, the lower the incentive to work to increase
income. The structure of the EITC (phase-in, plateau, and phase-out ) creates a wide
range of marginal tax rates for EITC recipients based on income. The marginal tax
rate for an EITC recipient, excluding interactions with other credits, can be broken
down into four ranges that correspond to the structure of the EITC:
! During the phase-in, when income is below the maximum earned
income, the marginal tax rate is negative and equal to the credit rate
because for each additional dollar of income the EITC recipient pays
no income tax and receives an increase in the EITC equal to the
credit rate times the additional income.
! Once the income reaches the plateau level, the marginal rate is zero
while there is no tax liability and no change in the EITC amount
(which is at the maximum).

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CRS-8
! During the phase-out of the EITC, for each additional dollar of
income the EITC recipient will pay taxes at the marginal tax rate and
have a reduction in the EITC at the phase-out rate creating a
marginal tax rate equal to the sum of the two changes. This results
in a marginal tax rate that is significantly higher than the statutory
tax rate.
! At the end of the phase-out of the EITC, when the EITC equals zero,
the marginal and statutory tax rates for the taxpayer are equal.
Figure 2 shows the statutory and marginal tax rates, in tax year 2007, as income
increases for a single parent family with one child. The marginal tax rates reflect the
combined impact of the statutory tax rate and the EITC phase-out and do not reflect
the use of any other tax credits.
Figure 2. Statutory and Marginal Tax Rates, Single Parent
Family with One Child, Tax Year 2007
0.4
Taxpayer no
longer eligible
0.3
for the E ITC
0.2
0.1
$8,390
te
0
Ra
$15,390
$25,850
$33,240
-0.1
-0.2
-0.3
-0.4
Incom e
S ta tutoryT ax R ate
M arginal T a x R ate
Source: Figure prepared by the Congressional Research Service (CRS).
Participation
The EITC program has grown significantly since its inception in 1975. In 1975,
there were 6.2 million recipients for a total of $1.2 billion in EITC, with 72.0% of the
EITC received as a refund, and an average EITC of $201. For tax year 2004, a total
of 22.3 million tax filers received an EITC, for a total of $40.6 billion. In 2004, the
average EITC was $1,817, and 88.3% of the EITC was received as a refund.

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CRS-9
Estimates of the percentage of EITC eligible families participating in the EITC
program (i.e., receiving an EITC ) ranged from 80%-86% in a 1993 study3 using
1990 data to 93%-96% for families with children in a 2001 study4 by the General
Accounting Office using 1999 data.
Table 2 provides the total EITC, refunded portion, number of recipients (tax
filers), and average credit for 1975 through 2004.
Table 2. EITC and Recipients 1975-2004
Refunded
Number of
Average
Total EITC
Tax Year
portion of EITC
Recipients
EITC
($ millions)
($ millions)
(thousands)
($)
1975
$1,250
$900
6,215
$201
1976
1,295
890
6,473
200
1977
1,127
880
5,627
200
1978
1,048
801
5,192
202
1979
2,052
1,395
7,135
288
1980
1,986
1,370
6,954
286
1981
1,912
1,278
6,717
285
1982
1,775
1,222
6,395
278
1983
1,795
1,289
7,368
224
1984
1,638
1,162
6,376
257
1985
2,088
1,499
7,432
281
1986
2,009
1,479
7,156
281
1987
3,391
2,930
8,738
450
1988
5,896
4,257
11,148
529
1989
6,595
4,636
11,696
564
1990
7,542
5,266
12,542
601
1991
11,105
8,183
13,665
813
1992
13,028
9,959
14,097
924
1993
15,537
12,028
15,117
1,028
1994
21,105
16,598
19,017
1,110
1995
25,956
20,829
19,334
1,342
3 John Karl Sholz, “The Earned Income Credit: Participation, Compliance, and Antipoverty
Effectiveness,” National Tax Journal, Mar. 1994, vol. 47, no. 1, pp. 63-87.
4 U.S. General Accounting Office, Earned Income Tax Credit Participation, GAO-20-290R,
Dec. 14, 2001.

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CRS-10
Refunded
Number of
Average
Total EITC
Tax Year
portion of EITC
Recipients
EITC
($ millions)
($ millions)
(thousands)
($)
1996
28,825
23,157
19,464
1,481
1997
30,389
24,396
19,391
1,567
1998
32,340
27,175
20,273
1,595
1999
31,901
27,604
19,259
1,656
2000
32,296
27,803
19,277
1,675
2001
35,784
29,043
19,593
1,704
2002
37,786
33,258
21,574
1,751
2003
39,186
34,508
22,112
1,772
2004
40,024
35,299
22,270
1,797
Sources: U.S. Congress, House Committee on Ways and Means. 2004 Green Book. Background
Material and Data on Programs Within the Jurisdiction of the Committee on Ways and Means, 108th
Congress, 2nd session, WMCP 108-6, Mar. 2004, p.13-41. Internal Revenue Service. Total File,
United States, Individual Income and Tax Data, by State and Size of Adjusted Gross Income, Tax
Years 2003 and 2004. Expanded unpublished version, Table 2.
Note: The number of recipients is the number of tax filers claiming the EITC.
Characteristics of Tax Year 2004 EITC Tax Returns
Number of Children. In tax year 2004, the majority of the EITC (61.8%)
went to families with two or more children, which represented 41.7% of the returns.
Table 3 shows the percent distribution of returns and total EITC by number of
children. Table 4 shows the number of recipients, amount of EITC, and average
EITC by number of children for tax year 2004.
Table 3. Percent Distribution of Returns and Total EITC by
Number of Children, Tax Year 2004
Percent of
Percent of
Total Returnsa
Total EITC
No children
21.1
1.9
One child
37.2
35.3
Two or more children
41.7
62.8
Total
100.0
100.0
Source: Table prepared by the Congressional Research Service (CRS) from data provided by the
Joint Committee on Taxation. Detail may not sum to total due to rounding.
a. Total returns is all returns claiming an EITC.

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CRS-11
Table 4. EITC by Number of Children, Tax Year 2004
Number
Number of
Percent
Total EITC
Average
of
Recipients
of EITC
($ thousands)
EITC
Children
(tax filers)
Refunded
None
4,690,000
1,023,000
$218
66.9
One
8,269,000
14,291,000
$1,728
87.1
Two or More
9,269,000
24,735,000
$2,669
89.6
Source: Table prepared by the Congressional Research Service (CRS) from data provided by the Joint
Committee on Taxation.
Filing Status. Heads of Household represented 52.0% of the EITC returns
and 64.7% of the total EITC on returns in 2004, whereas single filers represented
24.4% of the returns and only 10.0% of the EITC. Table 5 shows the percent
distribution of returns and total EITC by filing status.
Table 5. Percent Distribution of Returns and Total EITC by Tax
Filing Status, Tax Year 2004
Percent of
Percent of
Filing Status
Total Returnsa
Total EITC
Single
24.4
10.0
Married joint
23.6
25.3
Head of household
52.0
64.7
Total
100.0
100.0
Source: Table prepared by the Congressional Research Service (CRS) from data provided by the Joint
Committee on Taxation. Detail may not add to total due to rounding.
a. Total returns is all returns claiming an EITC.
Geographic Distribution. The distribution of EITC by state is a function of
the relative populations and income levels of the states. In general states with larger
populations or a large number of lower income workers will have more EITC
recipients. The number of federal EITC returns, the total EITC, average EITC, and
percent of the credit refunded by state for tax year 2004 are shown in Table 6.

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CRS-12
Table 6. Federal EITC Recipients and EITC Amount By State,
Tax Year 2004
Number of
Total EITC
Average
% of EITC
State
Returns
($ thousands)
EITC
Refunded
Alabama
490,840
1,022,676
$2,084
91.2%
Alaska
40,622
62,054
$1,528
88.7%
Arizona
407,689
739,201
$1,813
90.2%
Arkansas
281,721
546,238
$1,939
90.0%
California
2,506,646
4,449,344
$1,775
85.2%
Colorado
270,176
439,816
$1,628
86.8%
Connecticut
169,966
273,379
$1,608
88.6%
Delaware
57,976
101,460
$1,750
91.4%
District of Columbia
50,096
86,465
$1,726
91.9%
Florida
1,615,204
2,934,123
$1,817
87.0%
Georgia
865,368
1,732,097
$2,002
89.8%
Hawaii 88,732
141,483
$1,594
89.6%
Idaho
103,397
179,113
$1,732
87.4%
Illinois
867,646
1,576,538
$1,817
88.1%
Indiana
434,730
756,647
$1,740
90.5%
Iowa
173,109
279,607
$1,615
88.0%
Kansas
178,744
306,000
$1,712
89.7%
Kentucky
345,391
608,967
$1,763
89.2%
Louisiana
539,451
1,156,205
$2,143
91.6%
Maine
87,148
137,940
$1,583
84.4%
Maryland
349,544
597,436
$1,709
88.7%
Massachusetts
313,694
492,911
$1,571
86.8%
Michigan
662,912
1,169,292
$1,764
88.5%
Minnesota
263,568
411,785
$1,562
86.8%
Mississippi
374,257
797,087
$2,130
92.3%
Missouri
443,808
783,730
$1,766
89.7%
Montana
74,621
123,019
$1,649
86.5%
Nebraska
111,738
188,932
$1,691
88.9%
Nevada
163,974
276,192
$1,684
90.9%
New Hampshire
63,343
97,273
$1,536
84.3%
New Jersey
496,813
857,954
$1,727
87.6%
New Mexico
199,552
364,436
$1,826
90.8%
New York
1,506,529
2,672,975
$1,774
84.1%
North Carolina
765,997
1,433,813
$1,872
90.6%
North Dakota
40,047
64,533
$1,611
87.9%
Ohio
799,412
1,403,191
$1,755
89.9%
Oklahoma
316,231
584,880
$1,850
88.8%
Oregon
230,211
375,540
$1,631
87.8%
Pennsylvania
782,517
1,304,085
$1,667
89.8%
Rhode Island
66,332
112,949
$1,703
89.1%
South Carolina
431,190
824,156
$1,911
91.8%
South Dakota
55,869
92,564
$1,657
88.8%
Tennessee
551,439
1,021,754
$1,853
88.8%
Texas
2,220,726
4,509,906
$2,031
88.0%
Utah
143,034
249,399
$1,744
88.8%
Vermont
38,471
57,396
$1,492
82.8%
Virginia
500,323
874,558
$1,748
90.1%
Washington
363,727
601,285
$1,653
88.7%
West Virginia
145,376
247,525
$1,703
90.9%

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CRS-13
Number of
Total EITC
Average
% of EITC
State
Returns
($ thousands)
EITC
Refunded
Wisconsin
299,351
486,845
$1,626
88.6%
Wyoming
33,975
54,783
$1,612
88.6%
U.S. Total
22,383,233
40,661,537
$1,817
88.3%
Source: Internal Revenue Service, Total File, All States, Individual Income and Tax Data, by State
and Size of Adjusted Gross Income, Tax Year 2004, Expanded unpublished version, Table 2. U.S.
total does not include outlying areas.
Interaction With Other Tax Provisions
Other Federal Tax Credits. On the tax return, the EITC is calculated
after total tax liability and several nonrefundable credits. The nonrefundable tax
credits, which are taken against (reduce) tax liability, include credits for education,
dependent care, savings, and the child credit. To the extent an EITC eligible family
has a tax liability and can utilize one or more of these credits, the refundable portion
of the family’s EITC is higher. This is because using one or more of the tax credits
reduces tax liability before the EITC, but does not affect the calculation of the EITC.
For tax filers in the plateau or phase-out period of the EITC, pre-tax
contributions to savings for retirement, education or medical purposes can increase
the amount of the EITC by reducing the amount of “earned income” used to calculate
the EITC, in addition to reducing tax liability before the EITC if the contributions
also qualify for a nonrefundable credit. This is because the earned income for the
EITC, like the income subject to tax, does not include these pre-tax contributions as
income.
Means Tested Programs. By law, the EITC cannot be taken into account
for purposes of determining eligibility or benefits for food stamps, low-income
housing, and Medicaid and Social Security Income (SSI). Under Temporary Aid to
Needy Families (TANF), the states have the authority to determine if the receipt of
an EITC is taken into consideration in determining eligibility or benefits. Currently,
no state does so. However, an EITC refund that is saved may become an asset and
could be used in determining TANF eligibility and benefits.
State EITC Provisions. Currently, 18 states and the District of Columbia
offered an EITC for state taxes. Of these jurisdictions, three have a nonrefundable
EITC, and one (Maryland) has both a refundable and nonrefundable EITC. Another
state (Michigan) will begin a refundable state EITC in 2008. For states with an EITC
that is calculated based on the federal EITC, a change in the federal EITC will
generally flow through and change the state EITC unless the state takes positive
legislative action to alter or prevent the change.

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CRS-14
Issues
The structure, impact, and administration of the EITC are reflected in the
major policy issues — work incentives, marriage penalty, anti-poverty effectiveness
(family size), compliance, and the use of paid tax preparers.
Work Incentives. Although the original purpose of the EITC was to return
payroll taxes to low-income workers, in its current form as a cash transfer program
it provides assistance to working low income families to meet basic needs. As such
it may be viewed as creating an incentive to work, both in participating in the labor
force (beginning to work), and increases in work effort (more hours). Economic
theory suggests that the phase-in range of the EITC (when income is below the
maximum earned income) would create an incentive to begin work, and to work
more hours by increasing the marginal return to work after taxes. This is because
the EITC increases as work increases and is reflected in the negative marginal tax
rate during the phase-in range of the credit.
Conversely, the phase-out range of the EITC would create a disincentive to
work because the more the individual works and earns the greater the individual is
penalized (although the after-tax income is higher). The individual not only has to
pay taxes at the statutory rate, but the earned income credit is reduced by the phase-
out rate. This is reflected in a marginal tax rate for the phase-out period that is higher
than the statutory tax rate. In the phase-out range, an individual may attempt to
maintain a level EITC by reducing work hours (substituting leisure for work).
However, many workers do not have the flexibility (in their jobs) to reduce hours.
Alternatively, the EITC can be viewed as a wage supplement for lower
income workers. The wage supplement increases the hourly wage rate over the
phase-in range, the supplement remains steady over the plateau range, and over the
phase-out range the wage supplement is reduced, reducing the hourly wage down to
the level actually paid by the employer.
In evaluating the work incentives of the EITC it is important to remember that
all of the benefits and costs of work are not reflected in the marginal tax rate. A
family receiving TANF benefits may be required to work a stated number of hours
to maintain certain non-cash benefits. However, by working those hours the family
earns income that may reduce other non-cash benefits such as food stamps or housing
allowances, and may require additional cash expenditures for child care, clothing, etc.
Studies on the EITC and labor force participation have concluded that the
EITC has a significant positive impact on participation in the labor force, particularly

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CRS-15
for single mothers.5 Some studies have concluded that there is a negative impact on
work hours at the higher levels of income, but that the impact is not significant.6
Marriage Penalty. The structure of the EITC may, depending on the
relative income levels of both parties, impose a “marriage penalty”7 on single low-
income parents if they choose to marry. For example, in tax year 2007 two single
parents, each with one child and earned income of $15,000 would receive an EITC
of $2,853 each for a total of $5,706. If they marry, their combined income is
$30,000, and with two children, the EITC is $2,060. The EITC marriage penalty for
the couple is $3,646. The Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA, P.L. 107-16) reduced the marriage penalty for the family by $421
in 2007. The EGTRRA provisions for marriage penalty relief in the EITC will sunset
at the end of 2010.
Empirical research has concluded that the structure of the EITC, through the
phase-out and the marriage penalty, has a negative impact on the labor market
participation of nonworking spouses in two-parent families at higher income levels
(levels of income in the plateau or phase-out range of the EITC).8
Anti-Poverty Effectiveness (Family Size). 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 threshold (or level).
The structure of the EITC with respect to family size has not changed since 1990.
Although 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 2005 is shown in Table
7.
5 Bruce D. Meyer and Dan T. Rosenbaum, “Making Single Mothers Work: Recent Tax and
Welfare Policy and Its Effects,” National Tax Journal, vol. 53 (Dec. 2000), pp. 1027- 1043.
Robert Moffitt, Welfare Programs and Labor Supply, National Bureau of Economic
Research, Working Paper 9168, Sept. 2002.
6 Stacy Dickert, Scott Houser, and John Karl Scholz, “The Earned Income Tax Credit and
Transfer Programs: A Study of Labor Market and Program Participation,” Tax Policy and
the Economy, James M. Poterba ,ed. (National Bureau of Economic Research and the MIT
Press,1995), pp. 1-50. V. Joseph Hotz and John Karl Sholz, The Earned Income Credit,
National Bureau of Economic Research, Working Paper 8078, Jan. 2001.
7 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.
8 Nada Eissa and Hillary Williamson Hoynes, “The Earned Income Tax Credit and the Labor
Supply of Married Couples,” National Bureau of Economic Research, Working Paper 6856,
1998. V. Joseph Hotz and John Karl Sholz, “In-Work Benefits in the United States: The
Earned Income Credit,” The Economic Journal, vol. 106, no. 434 (Jan. 1996), pp. 156-169.

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CRS-16
Table 7. Impact of Family Size on Net Income after Taxes
Relative to Poverty Level, 2005
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
0
0
0
Child credit (regular credit
limited to tax before credits)
0
0
0
EITC
(3,630)
(3,630)
(3,630)
Additional child credit
(900)
(900)
(900)
(refundable portion of credit)
Net tax
(4,530)
(4,530)
(4,530)
Payroll tax
1,530
1,530
1,530
Net income after tax
23,000
23,000
23,000
Poverty level
19,806
23,307
26,096
Net income after tax as a
116.1%
98.7%
88.1%
percent of poverty level
Source: Table prepared by the Congressional Research Service.
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%. This over-
claim rate however, did not reflect any later efforts by the IRS to collect on the over
payments. Later studies by the IRS have resulted in lower over-claim rates. The
1997 and 1999 tax return studies9 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 filers’s qualified child. The most common qualifying
child error was that the child did not meet the residency test, six months or one year
depending on relationship. The second most common was the child not meeting the
9 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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CRS-17
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 filers’s own child.
After errors in claiming an unqualified child, errors in income reporting
accounted for 21.4% of the over-claims. Most frequent income reporting errors were
underreporting of earned income and modified adjusted gross income. Another
17.2% of known errors were for a qualifying child also being the qualifying child of
another tax filer.
As a result of the over-claim rates, there have been several legislative changes
to improve EITC compliance. Among them are: the requirement that dependents
have identification numbers (social security numbers); prohibitions of 2 to 10 years
on receiving the EITC after improperly or fraudulently receiving the credit; for tax
preparers due diligence requirements (maintaining certain paperwork); and
permission for the IRS to match tax filers to the Federal Case Registry of Child
Support Orders. (Maintained by the Department of Health and Human Services.)
In addition, some of the EGTRRA changes to the EITC definition of a
qualifying child and the tie-breaker rules (rules for when more than one person can
claim a child), may help in the future to reduce these problems. However, the general
rate of over-claims has not changed significantly since 1990.
To reduce the complexity created by the different definitions of a child,
proposals were 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. The Working Families Tax Relief Act of 2004 (P.L. 108-311) created a more
uniform definition of a child for tax purposes, including the EITC. This new
definition became effective with tax year 2005.2
In 2003, the IRS announced plans to conduct a pre-certification effort for the
tax year 2003 returns, in which tax filers expecting to claim the EITC would need to
pre-certify that any child claimed for the EITC met the residency requirement (had
resided with the tax filer for at least half of the tax year). The pre-certification effort
was converted to a study of approximately 25,000 returns expected to claim the
EITC, and combined with two other compliance studies related to the EITC: (1) a
study of filing status; and (2) an automated underreporter (income) study. The
Consolidated Appropriations Act of 2004 (P.L. 108-199) required a report to
Congress on the qualified child study (the pre-certification of a child for the EITC
residency requirement).
According to the IRS,10 the three studies uncovered and prevented payment
of more than $275 million in erroneous claims for the EITC, with approximately
2 For information on the new definition of a child, see CRS Report RS22016, Tax Benefits
for Families: Changes in the Definition of A Child, by Christine Scott.
10 The final report of the EITC initiative can be found on the IRS website at
[http://www.irs.gov/pub/irs-utl/irs_earned_income_tax_credit_initiative_final_report_to
_congress_october_2005.pdf].

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CRS-18
$250 of the $275 million from the automated underreporter study. In the automated
underreporter study, the IRS manually reviewed 300,000 tax returns that claimed the
EITC in tax year 2003, that also had indications of income misreporting for tax year
2002. Approximately 83% of the tax returns had a reduction or disallowance of the
EITC as a result of the manual review.
National Taxpayer Advocate’s “Most Serious Problems”
Each year the National Taxpayer Advocate11 must report to Congress and
analyze at least 20 serious problems taxpayers have with the tax system. The reports
for 2002 through 2005 included EITC related problems among those listed as the
“most serious problems” encountered by tax filers. In the report for 2005, included
among the problems for the EITC are the documentation requirements, the length of
time taken to complete examinations (particularly exams conducted through
correspondence with the taxpayer), the taxpayer response rate for examinations, and
delays in the re-certification process. It is important to note that while including the
time to complete the examination process (an average of 181 days in FY2005), the
Taxpayer Advocate noted that the time had declined each year since FY2002 (when
the average time for completion of an EITC examination was 220 days).
The Taxpayer Advocate Service (TAS) also did a study of TAS cases with
refunds frozen by Criminal Investigation (by the Questionable Refund Program),
which is an IRS program designed to stop fraud. The Taxpayer Advocates notes that
of the 473 returns selected for the study, 75% claimed the EITC and that 80% of the
returns selected for the study eventually received at least a partial refund. The
Taxpayer Advocate has made several recommendations for the CI program related
to the freezing of refunds including (1) that the IRS conduct a study of returns with
refunds frozen by CI that were not TAS cases; (2) notify taxpayers soon after their
refunds are frozen that their refunds are frozen and will not be released until a
determination is made (currently taxpayers are not notified); and (3) shorten the time
period (currently six months) during which other IRS organizations (such as TAS)
cannot help taxpayers with respect to frozen refunds.
On January 24, 2006, IRS Commissioner Mark Everson announced that he
had directed a review of the program, and that in the near future the IRS will
announce plans “to institute notification procedures as well as significant
improvements to minimize the number of taxpayers whose refunds are frozen
unnecessarily.”12
11 The National Taxpayer Advocate heads an independent program with the Internal
Revenue Service (IRS) known as the National Taxpayer Service. The program is designed
to handle taxpayer complaints not resolved through normal IRS procedures and to analyze
problems encountered by taxpayers with the IRS and suggest solutions for the problems.
12 Internal Revenue Service, news release, available at [http://www.irs.gov/newroom/article/
0,,id=15813,00.html]

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CRS-19
In addition to the problems listed by the National Taxpayer Advocate, the
Treasury Inspector General for Tax Administration, released a report,13 finding that
taxpayers were not treated consistently by the service centers regarding the two-year
ban, and that the can notice and other material related to the ban and re-certification
needed more clarification for taxpayers.
13 Treasury Inspector General for Tax Administration, Application of the Earned Income
Credit Two-Year Ban Could Be More Consistent, Accurate, and Clear to Taxpayers, 2004-
40-015, Dec. 2004.

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CRS-20
Appendix 1. Legislative History of the EITC14
The idea that became the EITC first arose during congressional consideration
of President Nixon’s 1971 welfare reform proposal. Nixon’s proposal, the Family
Assistance Plan, would have helped working poor, two-parent families with children
by means of a federal minimum cash guarantee that would have replaced the
federal-state welfare program of Aid to Families with Dependent Children (AFDC).
Work Bonus Plan (1972-1974 Proposals)
The EITC was patterned after a proposal, then known as a work bonus for the
working poor, recommended by the Senate Finance Committee in April 1972.
Though the idea originated as an alternative to the proposed Family Assistance
Program, the work bonus provision was advocated as a “refund” of Social Security
taxes paid by employers and employees on low annual earnings and was to have been
available only for wages subject to Social Security taxation.
The Senate approved the work bonus plan in 1972, 1973, and 1974, but the
House did not accept it until 1975.
Enactment of EITC in 1975
The Tax Reduction Act of 1975 (P.L. 94-12) included a provision that
established, in Section 32 of the Internal Revenue Code, a refundable credit to tax
filers with incomes below $8,000. This “earned income credit” was to equal 10% of
the first $4,000 of any earnings (including earnings not subject to Social Security
taxation) and thus could not exceed $400 per year. The credit was to be phased out,
at a rate of 10%, for adjusted gross income (AGI) above $8,000.
Extensions of EITC (1975-1977 Laws)
The Revenue Adjustment Act of 1975 (P.L. 94-164), Tax Reform Act of
1976 (P.L. 94-455), and Tax Reduction and Simplification Act of 1977 (P.L. 95-30)
each extended the EITC by one year.
Permanent Status for EITC and Rise in Maximum Credit
(1978 Law)
The Revenue Act of 1978 (P.L. 95-600) made the EITC permanent and
increased the maximum credit to $500 and the eligibility limit to $10,000, provided
for EITC payments in advance of the annual tax filing, and simplified eligibility
determinations.
14 This legislative history of the EITC is a shortened version of the more detailed history
in CRS Report 95-542, The Earned Income Tax Credit: A Growing Form of Aid to Low-
Income Workers, by James R. Storey.

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CRS-21
Under the 1978 law, the EITC was set at 10% of the first $5,000 of earnings
(including net earnings from self-employment). The maximum credit of $500 was
received for earnings between $5,000 and $6,000. For each dollar of AGI above
$6,000, the EITC was reduced by 12.5 cents, reaching $0 at an AGI of $10,000.
Rise in Maximum Credit (1984 Law)
The Deficit Reduction Act of 1984 (P.L. 98-369) raised the maximum credit
by 10%, from $500 to $550 by establishing the EITC at 11% of the first $5,000 of
earnings. Earnings between $5,000 and $6,500 qualified for the maximum credit of
$550. For each dollar of AGI above $6,500, the law required that the EITC be
reduced by 12.22 cents. As a result, the credit was completely phased out when AGI
reached $11,000.
Indexation of EITC and Rise in Maximum Credit (1986 Law)
Effective with tax year 1987, the Tax Reform Act of 1986 (P.L. 99-514)
increased the EITC from 11% of the first $5,000 of earnings to 14% of the first
$5,714 of earnings. The act also began indexing the credit for inflation. This was
done by indexing the maximum earned income eligible for the credit and phase-out
income level by using the change in the average Consumer Price Index (CPI) for the
12-month period ending August 31 of each year, from the CPI for the 12-month
period ending August 31, 1984. In addition, the starting point of the phase-out
income level was increased for 1987 and 1988. The 1986 Act also lowered the
phase-out rate from 12.22% to 10% beginning with the 1987 tax year.
The increase in the maximum earned income for the credit and the credit rate
raised the EITC, while the reduction in the phase-out rate reduced the marginal tax
rate on recipient earnings. The combination of a higher EITC and a lower phase-out
rate increased the income eligibility level from $11,000 in 1984 to $14,500 (in 1984
dollars) for 1987. During debate on the Tax Reform Act of 1986, it was said that
“the liberalization of the earned income credit will help to assure that low-income
citizens are no longer taxed into poverty.”15
Rise in Maximum Credit and Establishment of Family-Size
Adjustment and Supplemental Credits (1990 Law)
Basic EITC. Because the EITC was originally established as a work bonus
and advertised as an offset to the Social Security tax, it had not been designed to vary
by family size. Thus, the larger the family, the less it met the family’s needs.
Proposals were introduced in the 101st Congress to vary EITC credit amounts by
number of children, up to a maximum of two, three, or four children depending on
the bill. These proposals intended to increase EITC’s welfare role while continuing
its provision of payroll tax relief and work bonuses. However, no one proposed that
15 In floor statement of Senator Matsunaga, Congressional Record, daily edition, Sept. 26,
1986, p. S13818.

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CRS-22
EITC family-size variations be modeled after AFDC, which varied for much larger
family sizes.
The EITC expansion enacted in the Omnibus Budget Reconciliation Act
(OBRA) of 1990 (P.L. 101-508) took effect in 1991 and was to be completed in
1994. An adjustment for family size was introduced and the credit and phase-out
rates for each of the family sizes (one child , two or more children) were increased
each year. However, the planned rate increases for 1994 were superseded by a 1993
law. (See below.)
Supplemental Young Child Credit. Numerous proposals were
introduced in the 101st Congress to establish refundable tax credits for families with
young children. These proposals would have set credit amounts based on earned
income and number of qualifying children. Both House and Senate passed such
provisions in competing versions of child care legislation. These measures were seen
as aiding lower income families in need of child care for preschool children.
Final action in OBRA of 1990 limited additional credits for young children
to those under one year of age. Eligible families with such children had an extra 5.0
percentage points added to their credit rate in computing the EITC amount. This
extra credit had a maximum amount in 1993 of $388, and was phased out by adding
3.57 percentage points to the family’s phase-out rate. Thus, in 1993 families with
one or more children under age 1 had a combined credit rate of 23.5% or 24.5%,
depending on total number of children, and a combined phase-out rate of 16.78% or
17.50%.
This extra credit was ended effective for tax year 1994 by OBRA of 1993
(P.L. 103-66).
Supplemental Health Insurance Credit. A new refundable credit aimed
at helping parents finance health insurance for their children was included in the
Senate-passed OBRA of 1990. The House did not include such a provision, but it
was accepted by House-Senate conferees. The supplemental health insurance credit
applied to earnings up to the maximum amount to which the EITC applied and was
then reduced over the same income range used for the EITC phase-out. The rates set
for the child health insurance credit and its phase-out were 6.0% and 4.285%,
respectively. These percentages were added to those that applied to a family for the
basic EITC and, if eligible, the young child credit. The maximum amount of the
supplemental health insurance credit in 1993 was $465. The credit could not exceed
the health insurance premiums actually paid by a family during the tax year. Unlike
the basic EITC, this supplemental credit could not be received in advance of the
annual tax filing.
The health insurance credit was ended, effective in 1994, by OBRA of 1993.

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CRS-23
Expansion of Credits, Coverage of Childless Adults,
and Repeal of Supplemental Credits (1993 Law)
President Clinton began his term in office in 1993 with a pledge to use the
EITC to eliminate poverty for families with a member working full-time at the
minimum wage in order to “make work pay.” Fulfillment of his pledge required a
proposal to raise the EITC credit rates, especially for families with two or more
children. His proposal was enacted as part of OBRA of 1993 (P.L. 103-66) with little
change by Congress. President Clinton also proposed extending the EITC for the
first time to low-income working adults with no children to offset tax increases in
OBRA of 1993, and Congress adopted this proposal with only minor changes. To
offset part of the EITC expansion’s cost, and to meet the criticism of the EITC’s
growing complexity, Congress also passed the President’s proposal to repeal the
supplemental credits for young children and for child health insurance premiums as
part of OBRA of 1993.
Credit for Families. The EITC parameters for families were significantly
changed by OBRA 1993. The credit rates were increased from 23% to 34% in 1996
for a family with one child, and from 25% to 40% for a family with two or more
children. The phase-out rate for families with one child was slightly lowered (from
16.43% to 15.98%) and the phase-out rate for families with two or more children was
increased from 17.86% to 21.06%.
Extension of EITC to Childless Households. The Clinton
Administration proposal enacted in OBRA of 1993 extended the EITC for the first
time to workers who have no children. The main rationale for this credit was to
offset partly the effect on low-income workers of a gasoline tax increase included in
OBRA of 1993. The 1993 law provided, effective in 1994, a credit of 7.65% of the
first $4,000 of annual earnings, for a $306 maximum credit. It is phased out at a
7.65% rate, beginning at an income level of $5,000 and ending at $9,000. The
maximum earned income and the phase-out income level are adjusted annually for
inflation.
This credit applies to adults ages 25 to 64 who are not claimed as dependents
on anyone’s tax return. The age limits were imposed by Congress to exclude two
groups (students under age 25, retirees over age 64) whose incentive to work was not
regarded as an important priority.
Coverage of Overseas Military Personnel (1994 Law)
Before 1995, the EITC had always been restricted to families residing in the
United States. This rule excluded from EITC otherwise eligible lower income
American military families living in foreign countries. A provision in the 1994
legislation to implement the General Agreement on Tariffs and Trade (P.L. 103-465)
provides EITC eligibility for qualifying families outside the United States if their
foreign residence is because of a U.S. military assignment. This provision became
effective in 1995.

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CRS-24
This law also included measures to: (1) deny the EITC for wages earned by
prison inmates; and (2) deny eligibility to anyone who spent part of the tax year as
a nonresident alien.
Eligibility Limit Based on Investment Income (1995 Law)
Limitation of EITC eligibility by a filing unit’s income has always been based
on the greater of AGI or earnings. However, following up on a proposal in President
Clinton’s FY1996 budget, Congress enacted in 1995 (P.L. 104-7) a new limitation
tied to investment income. This provision prohibits EITC claims by tax filers whose
annual investment income exceeds $2,350. Investment income is defined to include
taxable interest and dividend income, tax-exempt interest income, and net income
from rent and royalties not derived in the normal course of the filer’s business. This
provision took effect in 1996. (It was modified in August 1996 action. See
discussion below.)
Revisions of EITC in the Welfare Reform Bill (1996 Law)
Although not proposing specific legislation, the FY1997 congressional budget
resolution (H.Con.Res. 178) “assumes reforms of the Earned Income Credit ... to
eliminate fraud and abuse within the program, to better target to low-income working
families with children, and to coordinate the credit with the $500 per child tax credit
that also is assumed in this budget.” In followup, Congress included EITC savings
in the welfare reform measure (H.R. 3734) signed by President Clinton on August 22,
1996 (P.L. 104-193). These provisions are described below.
Deny EITC to Undocumented Workers. This provision requires tax
filers to have valid taxpayer identification numbers (usually Social Security numbers)
to be eligible for the EITC. Social Security numbers are issued only to persons who
can document their age, identity, and U.S. citizenship or legal alien status. It
becomes effective for tax returns due more than 30 days after the enactment date.
This measure helps the Internal Revenue Service (IRS) gain compliance from tax
filers lacking valid numbers before accepting their EITC claims.
Disqualified Income. Congress acted in March 1995 (see earlier
discussion) to exclude from EITC eligibility all filers with “disqualified income,”
defined as income in excess of $2,350 a year from interest (taxable and tax-exempt),
dividends, and net rents and royalties. The welfare reform bill broadened this
definition to include net capital gains and net passive income. The maximum
allowance for disqualifying income was reduced from $2,350 to $2,200 for 1996 and
indexed for inflation in later years.
Broaden Income Used in EITC Phase-out. The EITC is phased out
when the greater of earnings or AGI exceeds a certain level ($11,610 in 1996 for
families with children). Broadening the definition of income used for EITC phase-
out reduces the EITC for persons with income from the sources to be included.
Effective for 1996, the welfare reform bill expanded the income used to phase out the
EITC by netting out certain losses that are normally taken into account in calculating

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CRS-25
AGI. These losses are net capital losses, net losses from estates and trusts, net losses
from nonbusiness rents and royalties, and half of net business losses.
Allow State Welfare Programs to Count EITC. The 1996 welfare
reform bill (Personal Responsibility and Work Opportunity Reconciliation Act, P.L.
104-193) repealed AFDC. And in its place created the Temporary Assistance to
Needy Families (TANF) program, a state-run system funded partly by federal block
grants. This conversion to state control alters the EITC-welfare relationship. Federal
law had required that the EITC be disregarded as income in determining eligibility
for AFDC, Food Stamps, Medicaid, Supplemental Security Income (SSI), and
housing aid. Lump-sum EITC payments had to be ignored in comparing applicants’
assets to program asset limits for the month of receipt and the next month. (The
Food Stamp program must ignore lump-sum EITC payments for one year.) Ending
AFDC eliminates federal restrictions on states’ treatment of the EITC for cash
welfare (TANF) recipients. States may count the EITC as income available to
families aided by TANF programs and reduce their welfare accordingly. Lump-sum
EITC receipt may be counted by states as assets immediately available to state-aided
families, thereby denying them that aid if counting the EITC causes their assets to
exceed state asset limits. States adopting such policies may spend less on aid to
needy families from their federal grants, in effect substituting the federal EITC for
state welfare and lowering the income of those affected.
Denying Credit Based on Prior Claims (1997 Laws)
To improve compliance related to the EITC, the Taxpayer Relief Act of 1997
(P.L. 105-34), denied the EITC to tax filers for a specified period of time if the tax
filers had previously made a fraudulent or reckless EITC claim. A tax filer is denied
the EITC for two years after it has been determined that the tax filer made a reckless
claim, and ten years after a determination that a tax filer has made a fraudulent claim.
The Balanced Budget Act of 1997 (P.L. 105-33) provided initial funding for a
five-year initiative by the IRS to improve compliance for the EITC.
Reduction of Marriage Penalty and Simplification of the EITC
(2001 Law)
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA,
P.L. 107-16), to reduce the marriage penalty, increased the phase-out income levels
for married couples filing a joint return by $1,000 for tax years 2002 through 2004,
$2,000 for tax years 2005 through 2007, and $3,000 beginning in tax year 2008
(indexed for inflation). The bill also simplified the definition of earned income to
reflect only compensation included in gross income; based the phase-out of the
credit on adjusted gross income instead of expanded (or modified) gross income; and
eliminated the reduction in the EITC for the alternative minimum tax.
Uniform Definition of a Child and Combat Pay (2004 Law)
The Working Families Tax Relief Act of 2004 (P.L. 108-311) created a more
uniform definition of a child for tax purposes. The EITC, along with other tax
provisions used by families (child tax credit, head of household filing status, and

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CRS-26
dependent care tax provisions) are linked to this more uniform definition of a child
under the personal exemption tax provision. The definition of a child and the rules
for when more than one party may claim a child for these tax provisions are the same
as the rules for the EITC in tax year 2004. In effect, the changes in the tax code for
a more uniform definition of a child will not impact eligibility for the EITC. In
addition, P.L. 108-311 allowed members of the armed forces to include combat pay
for purposes of computing the earned income credit for tax years that ended after
October 4, 2004 and before January 1, 2006 (generally tax years 2004 and 2005).
Hurricane Relief (2005 Law)
The Katrina Emergency Relief Act (P.L. 109-73) provided that taxpayers
affected by Hurricane Katrina may use their tax year 2004 earned income to compute
their 2005 EITC.
Extension of Combat Pay & Hurricane Relief (2005 Law)
The Gulf Opportunity Zone Act of 2005 (P.L. 109-135) extended the option
to include combat pay for calculating the credit for another year (tax year 2006, or tax
years ending before January 1, 2007).
P.L. 109-135 also extended the option of using 2004 income to compute
2005 EITC to taxpayers affected by Hurricane Rita, and clarified that to use this
election, the taxpayer’s 2005 income had to be less than the taxpayer’s 2004 income.

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CRS-27
Appendix 2. History of the EITC Parameters
Since its inception in 1975, the EITC has evolved from a small program to
refund a portion of social security taxes to the largest anti-poverty entitlement
program. The credit has change through changes in eligibility and in the values of
the parameters used to calculate the credit. Table 8 shows the changes to the
parameters for the EITC for tax years 1975 through 2007.
Table 8. EITC Parameters, 1975-2007
Credit
Maximum
Phase-Out
Income
Maximum
Phase-Out
Rate
Earned
Income
Where
Credita
Rate (%)
(%)
Income
Level
EITC=$0
For families with children:
1975
10.0
4,000
400
10.0
4,000
8,000
1976
10.0
4,000
400
10.0
4,000
8,000
1977
10.0
4,000
400
10.0
4,000
8,000
1978
10.0
4,000
400
10.0
4,000
8,000
1979
10.0
5,000
500
12.5
6,000
10,000
1980
10.0
5,000
500
12.5
6,000
10,000
1981
10.0
5,000
500
12.5
6,000
10,000
1982
10.0
5,000
500
12.5
6,000
10,000
1983
10.0
5,000
500
12.5
6,000
10,000
1984
10.0
5,000
500
12.5
6,000
10,000
1985
10.0
5,000
500
12.22
6,500
11,000
1986
10.0
5,000
500
12.22
6,500
11,000
1987
14.0
6,080
851
10.0
6,920
15,432
1988
14.0
6,240
874
10.0
9,840
18,576
1989
14.0
6,500
910
10.0
10,240
19,340
1990
14.0
6,810
953
10.0
10,730
20,264

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CRS-28
Credit
Maximum
Phase-Out
Income
Maximum
Phase-Out
Rate
Earned
Income
Where
Credita
Rate (%)
(%)
Income
Level
EITC=$0
For families with one child:
1991
16.7
7,140
1,192
11.93
11,250a
21,250a
1992
17.6
7,520
1,324
12.57
11,840a
22,370a
1993
18.5
7,750
1,434
13.21
12,200a
23,050a
1994
26.3
7,750
2,038
15.98
11,000
23,750
1995
34.0
6,150
2,094
15.98
11,290
24,396
1996
34.0
6,350
2,152
15.98
11,650
25,100
1997
34.0
6,500
2,210
15.98
11,950
25,800
1998
34.0
6,650
2,271
15.98
12,300
26,500
1999
34.0
6,800
2,312
15.98
12,500
26,950
2000
34.0
6,900
2,353
15.98
12,700
27,450
2001
34.0
7,100
2,428
15.98
13,100
28,300
2002
34.0
7,350
2,506
15.98
13,550b
29,250b
2003
34.0
7,490
2,547
15.98
13,730b
29,666b
2004
34.0
7,660
2,604
15.98
14,040b
30,338b
2005
34.0
7,830
2,662
15.98
14,370c
31,030c
2006
34.0
8,080
2,747
15.98
14,810c
32,001c
2007
34.0
8,390
2,853
15.98
15,390c
33,241c
For families with two or more children:
1991
17.3
7,140
1,235
12.36
11,250a
23,122a
1992
18.4
7,520
1,384
13.14
11,840a
22,370a
1993
19.5
7,750
1,511
13.93
12,200a
23,050a
1994
30.0
8,425
2,528
17.86
11,000
25,300
1995
36.0
8,600
3,110
20.22
11,290
26,673
1996
40.0
8,890
3,556
21.06
11,650
28,495
1997
40.0
9,100
3,656
21.06
11,950
29,290
1998
40.0
9,350
3,756
21.06
12,300
30,095
1999
40.0
9,500
3,816
21.06
12,500
30,580
2000
40.0
9,700
3,888
21.06
12,700
31,152

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CRS-29
Credit
Maximum
Phase-Out
Income
Maximum
Phase-Out
Rate
Earned
Income
Where
Credita
Rate (%)
(%)
Income
Level
EITC=$0
2001
40.0
10,000
4,008
21.06
13,100
32,121
2002
40.0
10,350
4,140
21.06
13,550b
33,150b
2003
40.0
10,510
4,204
21.06
13,730b
33,666b
2004
40.0
10,750
4,300
21.06
14,040b
34,458b
2005
40.0
11,000
4,400
21.06
14,370c
35,263c
2006
40.0
11,340
4,536
21.06
14,810c
36,348c
2007
40.0
11,790
4,716
21.06
15,390c
37,783c
For childless adults:
1994
7.65
4,000
306
7.65
5,000
9,000
1995
7.65
4,100
314
7.65
5,130
9,230
1996
7.65
4,200
323
7.65
5,300
9,500
1997
7.65
4,300
332
7.65
5,450
9,750
1998
7.65
4,450
341
7.65
5,600
10,050
1999
7.65
4,500
347
7.65
5,700
10,200
2000
7.65
4,600
353
7.65
5,800
10,400
2001
7.65
4,750
364
7.65
5,950b
10,750b
2002
7.65
4,900
376
7.65
6,100b
11,100b
2003
7.65
4,990
382
7.65
6,240b
11,230b
2004
7.65
5,100
390
7.65
6,390b
11,490b
2005
7.65
5,220
399
7.65
6,530c
11,750c
2006
7.65
5,380
412
7.65
6,740c
12,120c
2007
7.65
5,590
428
7.65
7,000c
12,590c
Source: Table prepared by the Congressional Research Service.
a. The credit maximums for 1991-1993 do not include the two supplemental credits that were
available to some EITC recipients in those years. The young child supplement added 5
percentage points to a family’s credit rate; the child health insurance supplement added up
to 6 points.
b. For this tax year the phase-out income level for a married couple filing a joint tax return is $1,000
higher than shown in the table.
c. For this tax year the phase-out income level for a married couple filing a joint tax return is $2,000
higher than shown in the table.

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