ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱ ŸŽ›Ÿ’Ž ȱ ‘›’œ’—ŽȱŒ˜ȱ ™ŽŒ’Š•’œȱ’—ȱ˜Œ’Š•ȱ˜•’Œ¢ȱ Š—žŠ›¢ȱřǰȱŘŖŖŞȱ ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŝȬśŝŖŖȱ    ǯŒ›œǯ˜Ÿȱ řŗŝŜŞȱ ȱŽ™˜›ȱ˜›ȱ˜—›Žœœ Prepared for Members and Committees of Congress ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ž––Š›¢ȱ The Earned Income Tax Credit (EITC or EIC) began in 1975 as a temporary program to return a portion of the Social Security tax 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 2005 (the latest year for which data are available) received an average EITC of $230, families with one child received an average EITC of $1,809, and families with two or more children received an average EITC of $2,833. 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, 19 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ ˜—Ž—œȱ Eligibility .................................................................................................................................. 1 Families with Children........................................................................................................ 1 Childless Adults .................................................................................................................. 2 Credit Amount........................................................................................................................... 2 Calculation of EITC Amount .............................................................................................. 2 Indexing .............................................................................................................................. 6 Marginal Tax Rates ............................................................................................................. 7 Participation .............................................................................................................................. 8 Characteristics of Tax Year 2005 EITC Tax Returns............................................................... 10 Number of Children .......................................................................................................... 10 Filing Status ...................................................................................................................... 10 Geographic Distribution.....................................................................................................11 Interaction With Other Tax Provisions.................................................................................... 13 Other Federal Tax Credits ................................................................................................. 13 Means Tested Programs .................................................................................................... 13 State EITC Provisions....................................................................................................... 13 Issues ....................................................................................................................................... 13 Work Incentives ................................................................................................................ 13 Marriage Penalty............................................................................................................... 14 Anti-Poverty Effectiveness (Family Size) ........................................................................ 15 Compliance ............................................................................................................................. 16 National Taxpayer Advocate’s “Most Serious Problems”....................................................... 17 ’ž›Žœȱ 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 Š‹•Žœȱ Table 1. EITC Parameters for Tax Years 2006-2008 ....................................................................... 4 Table 2. EITC and Recipients 1975-2005 ....................................................................................... 9 Table 3. Percent Distribution of Returns and Total EITC by Number of Children, Tax Year 2005 ................................................................................................................................... 10 Table 4. EITC by Number of Children, Tax Year 2005 ................................................................. 10 Table 5. Percent Distribution of Returns and Total EITC by Tax Filing Status, Tax Year 2005.............................................................................................................................................11 Table 6. Federal EITC Recipients and EITC Amount by State, Tax Year 2005 .............................11 Table 7. Impact of Family Size on Net Income after Taxes Relative to Poverty Threshold, Tax Year 2006............................................................................................................................. 15 Table B-1. EITC Parameters, 1975-2008 ...................................................................................... 26 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ™™Ž—’¡Žœȱ Appendix A. Legislative History of the EITC............................................................................... 19 Appendix B. History of the EITC Parameters............................................................................... 26 ˜—ŠŒœȱ Author Contact Information .......................................................................................................... 28 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ T he 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 cash program1 with 22.8 million tax filers receiving $42.4 billion in tax credits for tax year 2005. Appendix A outlines the history of the EITC and Appendix B shows how the parameters for calculating the EITC have changed since the original enactment in 1975. •’’‹’•’¢ȱ 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. Š–’•’Žœȱ ’‘ȱ‘’•›Ž—ȱ 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 taxexempt 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 selfemployment 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 • 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 1 The EITC is larger in terms of spending and recipients than the Temporary Assistance to Needy Families (TANF) program. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ 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.2 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 include 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 through tax year 2006 and the Tax Relief and Health Care Act of 2006 (P.L. 109-432) extended the option through tax year 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. ‘’••Žœœȱž•œȱ 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 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). ›Ž’ȱ–˜ž—ȱ Š•Œž•Š’˜—ȱ˜ȱ ȱ–˜ž—ȱ Claimants receive an EITC in one of four ways: 2 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Řȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ • 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.3 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. 3 Childless adults cannot receive the EITC through advance payments. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ řȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ . EITC Levels by Income, Single-Parent Family with One Child,Tax Year 2007 Figure 1 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 2006, 2007, and 2008 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. Table 1. EITC Parameters for Tax Years 2006-2008 2006 No children Maximum earned income amount Maximum credit Phase-out income level Phase-out income level for married filing joint Income where EITC = $0 Income where EITC=$0 for married filing joint One child Maximum earned income amount ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ — $5,380 $412 $6,740 $8,740 $12,120 $14,120 — $8,080 2007 — $5,590 $428 $7,000 $9,000 $12,590 $14,590 — $8,390 2008 $5,720 $438 $7,160 $10,160 $12,880 $15,880 $8,580 Credit Rate 7.65% — — — — — — 34.00% — PhaseOut Rate 7.65% — — — — — — 15.98% — Śȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ 2006 Maximum credit Phase-out income level Phase-out income level for married filing joint Income where EITC = $0 Income where EITC=$0 for married filing joint Two or more children Maximum earned income amount Maximum credit Phase-out income level Phase-out income level for married filing joint Income where EITC = $0 Income where EITC=$0 for married filing joint 2007 2008 $2,747 $14,810 $16,810 $32,001 $34,001 — $11,340 $4,536 $14,810 $16,810 $36,348 $38,348 $2,853 $15,390 $17,390 $33,241 $35,241 — $11,790 $4,716 $15,390 $17,390 $37,783 $39,783 $2,917 $15,740 $18,740 $33,995 $36,995 $2,800 $2,900 Disqualifying investment income level Source: Table prepared by the Congressional Research Service (CRS). Credit Rate PhaseOut Rate $12,060 $4,824 $15,740 $18,740 $38,646 $41,646 — — — — — 40.00% — — — — — — — — — — — 21.06% — — — — — — $2,950 — — 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. Notes: 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 levelcategory times phase-out ratecategory] 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): ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ śȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ 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 —Ž¡’—ȱ 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 phaseout 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 phaseout rate). ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Ŝȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ • 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 Š›’—Š•ȱŠ¡ȱŠŽœȱ 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). • 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŝȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ Figure 2. Statutory and Marginal Tax Rates, Single-Parent Family with One Child,Tax Year 2007 0.4 Taxpayer no longer eligible for the EITC 0.3 0.2 Rate 0.1 $8,390 0 $15,390 $25,850 $33,240 -0.1 -0.2 -0.3 -0.4 Income StatutoryTax Rate Marginal Tax Rate Source: Figure prepared by the Congressional Research Service (CRS). Š›’Œ’™Š’˜—ȱ 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 2005, a total of 22.8 million tax filers received an EITC, for a total of $42.4 billion. In 2005, the average EITC was $1,894, and 88.4% of the EITC was received as a refund. Estimates of the percentage of EITC eligible families participating in the EITC program (i.e., receiving an EITC ) ranged from 80%-86% in a 1993 study4 using 1990 data to 93%-96% for families with children in a 2001 study5 by the General Accounting Office using 1999 data. Table 2 provides the total EITC, refunded portion, number of recipients (tax filers), and average credit for 1975 through 2005. 4 John Karl Sholz, “The Earned Income Credit: Participation, Compliance, and Antipoverty Effectiveness,” National Tax Journal, March 1994, vol. 47, no. 1, pp. 63-87. 5 U.S. General Accounting Office, Earned Income Tax Credit Participation, GAO-20-290R, December 14, 2001. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Şȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ Table 2. EITC and Recipients 1975-2005 Tax Year Total EITC ($ millions) Refunded Portion of EITC ($ millions) Number of Recipients (thousands) Average EITC ($) 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 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 2005 42,410 37,465 22,752 1,864 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 through 2005. Expanded unpublished version, Table 2.5. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ şȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ Note: The number of recipients is the number of tax filers claiming the EITC. ‘Š›ŠŒŽ›’œ’Œœȱ˜ȱŠ¡ȱŽŠ›ȱŘŖŖśȱ ȱŠ¡ȱŽž›—œȱ ž–‹Ž›ȱ˜ȱ‘’•›Ž—ȱ In tax year 2005, the majority of the EITC (61.2%) went to families with two or more children, which represented 40.9% 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 2005. . Percent Distribution of Returns and Total EITC by Number of Children,Tax Year 2005 Table 3 hildren One child Two or more children No c Total Percent of Percent of Total Returnsa Total EITC 21.2 37.9 40.9 100.0 2.6 36.2 61.2 100.0 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. Source: Number of Children Table 4. EITC by Number of Children,Tax Year 2005 Number of Recipients (tax filers) Total EITC ($ thousands) Average EITC Percent of EITC Refunded None 4,737,000 1,089,000 $230 68.9 One 8,479,000 15,430,000 $1,809 87.3 Two or More 9,146,000 25,915,000 $2,833 89.8 Source: Table prepared by the Congressional Research Service (CRS) from data provided by the Joint Committee on Taxation. ’•’—ȱŠžœȱ Heads of Household represented 53.2% of the EITC returns and 65.6% of the total EITC in 2005, whereas single filers represented 24.2% of the returns and only 9.6% of the EITC. Table 5 shows the percent distribution of returns and total EITC by filing status. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗŖȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ Table 5. Percent Distribution of Returns and Total EITC by Tax Filing Status, Tax Year 2005 Filing Status Percent of Percent of Total Returnsa Total EITC Single Married joint Head of household Total 24.2 22.7 53.2 100.0 9.6 24.8 65.6 100.0 Table prepared by the Congressional Research Service (CRS) from data provided by the Joint Committee on Taxation. Detail may not add to total due to rounding. a. Total returns is all returns claiming an EITC. Source: Ž˜›Š™‘’Œȱ’œ›’‹ž’˜—ȱ The distribution of EITC by state is a function of the relative populations and income levels of the states. In general states with larger populations or a large number of lower income workers will have more EITC recipients. The number of federal EITC returns, the total EITC, average EITC, and percent of the credit refunded by state for tax year 2005 are shown in Table 6. . Federal EITC Recipients and EITC Amount by State,Tax Year 2005 Table 6 State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Number of Returns 502,914 41,578 413,730 287,085 2,501,510 274,839 172,838 59,692 50,041 1,631,758 905,365 87,540 106,143 884,010 446,347 177,348 181,348 352,878 Total EITC ($ thousands) 1,089,650 65,838 771,178 574,086 4,575,681 461,368 286,109 107,849 88,386 3,054,048 1,876,182 143,818 189,334 1,669,290 802,842 294,858 318,957 642,625 Average EITC 2,166.67 1,583.48 1,863.96 1,999.71 1,829.17 1,678.68 1,655.36 1,806.76 1,766.27 1,871.63 2,072.29 1,642.88 1,783.76 1,888.32 1,798.69 1,662.60 1,758.81 1,821.10 % of EITC Refunded 91.1% 89.1% 90.2% 90.0% 84.9% 87.2% 88.7% 91.1% 91.7% 86.7% 89.7% 89.8% 87.5% 87.8% 90.5% 88.4% 89.8% 89.3% ŗŗȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ State Louisiana Number of Returns Total EITC ($ thousands) Average EITC % of EITC Refunded 494,289 1,088,921 2,203.00 91.7% 88,923 145,056 1,631.25 84.4% Maryland 352,221 620,577 1,761.90 88.4% Massachusetts 319,973 518,021 1,618.95 86.9% Michigan 680,765 1,245,934 1,830.20 88.1% Minnesota 272,171 442,074 1,624.25 87.1% Mississippi 376,998 830,508 2,202.95 92.2% Missouri 451,570 826,976 1,831.34 89.7% Montana 74,627 125,715 1,684.58 86.7% Nebraska 113,877 198,808 1,745.81 89.0% Nevada 169,055 292,511 1,730.27 90.8% 64,012 501,105 199,825 1,527,318 788,523 40,222 815,691 318,879 231,934 799,335 68,034 439,010 56,415 565,090 2,288,849 145,622 38,824 503,896 364,929 146,840 309,552 33,208 22,718,546 100,433 890,122 373,090 2,774,885 1,526,465 66,353 1,471,341 607,091 390,857 1,376,533 119,536 864,267 95,967 1,077,468 4,826,049 260,639 59,499 908,481 617,971 256,234 522,675 55,092 42,588,248 1,568.97 1,776.32 1,867.08 1,816.84 1,935.85 1,649.67 1,803.80 1,903.83 1,685.21 1,722.10 1,757.00 1,968.67 1,701.09 1,906.72 2,108.50 1,789.83 1,532.53 1,802.91 1,693.40 1,744.99 1,688.49 1,659.00 1,874.60 84.3% 87.5% 90.7% 84.4% 90.5% 88.1% 89.9% 88.9% 87.9% 89.8% 89.1% 91.7% 89.2% 88.6% 88.0% 88.9% 83.2% 90.0% 88.7% 91.0% 88.9% 89.1% 88.3% Maine New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming U.S. Total Internal Revenue Service, Total File, All States, Individual Income and Tax Data, by State and Size of Adjusted Gross Income, Tax Year 2005, Expanded unpublished version, Table 2.5. U.S. total does not include outlying areas. Source: ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗŘȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ —Ž›ŠŒ’˜—ȱ’‘ȱ‘Ž›ȱŠ¡ȱ›˜Ÿ’œ’˜—œȱ ‘Ž›ȱŽŽ›Š•ȱŠ¡ȱ›Ž’œȱ 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. ŽŠ—œȱŽœŽȱ›˜›Š–œȱ 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. ŠŽȱ ȱ›˜Ÿ’œ’˜—œȱ Currently, 19 states and the District of Columbia offer an EITC for state taxes. Of these jurisdictions, three have a nonrefundable EITC. In 2008, three states (Louisiana, Michigan, and North Carolina) will begin a refundable state EITC. 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. œœžŽœȱ 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. ˜›”ȱ —ŒŽ—’ŸŽœȱ 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 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗřȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ 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 for single mothers.6 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.7 Š››’ŠŽȱŽ—Š•¢ȱ The structure of the EITC may, depending on the relative income levels of both parties, impose a “marriage penalty”8 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. 6 Bruce D. Meyer and Dan T. Rosenbaum, “Making Single Mothers Work: Recent Tax and Welfare Policy and Its Effects,” National Tax Journal, vol. 53 (December 2000), pp. 1027-1043. Robert Moffitt, Welfare Programs and Labor Supply, National Bureau of Economic Research, Working Paper 9168, September 2002. 7 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, January 2001. 8 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗŚȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ 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).9 —’Ȭ˜ŸŽ›¢ȱŽŒ’ŸŽ—ŽœœȱǻŠ–’•¢ȱ’£ŽǼȱ While the EITC is available at incomes above the federal poverty thresholds, 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 threshold because of the EITC, while families with three or more children at the same income level and EITC may slip below the poverty threshold. An example for tax year 2006 is shown in Table 7. Table 7. Impact of Family Size on Net Income after Taxes Relative to Poverty Threshold,Tax Year 2006 Family 1. Two Adults, Two Children Income($) Federal tax before credits ($) Child credit (regular credit limited to tax before credits) ($) EITC ($) Additional child credit (refundable portion of credit) ($) Net tax refund after credits ($) Payroll tax ($) Net income after tax ($) Poverty level ($) Net income after tax as a percent of poverty level Source: Family 2. Two Adults, Three Children Family 3. Two Adults, Four Children 20,000 0 0 20,000 0 0 20,000 0 0 3,864 1,305 3,864 1,305 3,864 1,305 5,169 (1,530) 23,639 20,444 115.6% 5,169 (1,530) 23,639 24,059 98.3% 5,169 (1,530) 23,639 26,938 87.8% Table prepared by the Congressional Research Service. Certain childless adults, even if the adult receives the EITC, also may have a net income after tax that is lower than the poverty threshold. In tax year 2006, a childless adult working full-time (40 hours a week for 52 weeks) at the minimum wage (in 2006) of $5.25 would earn $10,920. That adult would receive an EITC of $92. However, when combined with a tax liability before credits 9 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 (January 1996), pp. 156-169. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗśȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ of $246, and payroll taxes of $835, the adult has an after tax income of $10,177. This is 98.9% of the poverty threshold (for one adult) of $10,294. ˜–™•’Š—ŒŽȱ 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 overclaim rates. The 1997 and 1999 tax return studies10 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 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) 10 Internal Revenue Service, Department of the Treasury, “Compliance Estimates for Earned income Tax Credit Claimed on 1999 Returns,” February 28, 2002, p. 18. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗŜȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ created a more uniform definition of a child for tax purposes, including the EITC. This new definition became effective with tax year 2005.11 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,12 the three studies uncovered and prevented payment of more than $275 million in erroneous claims for the EITC, with approximately $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. Š’˜—Š•ȱŠ¡™Š¢Ž›ȱŸ˜ŒŠŽȂœȱȃ˜œȱŽ›’˜žœȱ›˜‹•Ž–œȄȱ Each year the National Taxpayer Advocate13 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) 11 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. 12 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. 13 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗŝȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ 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.”14 In addition to the problems listed by the National Taxpayer Advocate, the Treasury Inspector General for Tax Administration, released a report,15 finding that taxpayers were not treated consistently by the service centers regarding the two-year ban, and that the ban notice and other material related to the ban and re-certification needed more clarification for taxpayers. 14 Internal Revenue Service, news release, available at http://www.irs.gov/newroom/article/0,,id=15813,00.html. 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, December 2004. 15 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗŞȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ™™Ž—’¡ȱǯ Ž’œ•Š’ŸŽȱ ’œ˜›¢ȱ˜ȱ‘Žȱ ŗŜȱ 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). ˜›”ȱ˜—žœȱ•Š—ȱǻŗşŝŘȬŗşŝŚȱ›˜™˜œŠ•œǼȱ 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. —ŠŒ–Ž—ȱ˜ȱ ȱ’—ȱŗşŝśȱ 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. ¡Ž—œ’˜—œȱ˜ȱ ȱǻŗşŝśȬŗşŝŝȱŠ œǼȱ 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. Ž›–Š—Ž—ȱŠžœȱ˜›ȱ ȱŠ—ȱ’œŽȱ’—ȱŠ¡’–ž–ȱ›Ž’ȱǻŗşŝŞȱ Š Ǽȱ 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. 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 16 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗşȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ $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. ’œŽȱ’—ȱŠ¡’–ž–ȱ›Ž’ȱǻŗşŞŚȱŠ Ǽȱ 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. —Ž¡Š’˜—ȱ˜ȱ ȱŠ—ȱ’œŽȱ’—ȱŠ¡’–ž–ȱ›Ž’ȱǻŗşŞŜȱŠ Ǽȱ 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 12month 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.”17 ’œŽȱ’—ȱŠ¡’–ž–ȱ›Ž’ȱŠ—ȱœŠ‹•’œ‘–Ž—ȱ˜ȱŠ–’•¢Ȭ’£Žȱ “žœ–Ž—ȱŠ—ȱž™™•Ž–Ž—Š•ȱ›Ž’œȱǻŗşşŖȱŠ Ǽȱ Šœ’Œȱ ȱ 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 EITC familysize 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 17 In floor statement of Senator Matsunaga, Congressional Record, daily edition, September 26, 1986, p. S13818. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŘŖȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ 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.) ž™™•Ž–Ž—Š•ȱ˜ž—ȱ‘’•ȱ›Ž’ȱ 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). ž™™•Ž–Ž—Š•ȱ ŽŠ•‘ȱ —œž›Š—ŒŽȱ›Ž’ȱ 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. ¡™Š—œ’˜—ȱ˜ȱ›Ž’œǰȱ˜ŸŽ›ŠŽȱ˜ȱ‘’••Žœœȱž•œǰȱŠ—ȱŽ™ŽŠ•ȱ˜ȱ ž™™•Ž–Ž—Š•ȱ›Ž’œȱǻŗşşřȱŠ Ǽȱ 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 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Řŗȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ 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. ›Ž’ȱ˜›ȱŠ–’•’Žœȱ 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%. ¡Ž—œ’˜—ȱ˜ȱ ȱ˜ȱ‘’••Žœœȱ ˜žœŽ‘˜•œȱ 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. ˜ŸŽ›ŠŽȱ˜ȱŸŽ›œŽŠœȱ’•’Š›¢ȱŽ›œ˜——Ž•ȱǻŗşşŚȱŠ Ǽȱ 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. 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. •’’‹’•’¢ȱ’–’ȱŠœŽȱ˜—ȱ —ŸŽœ–Ž—ȱ —Œ˜–ŽȱǻŗşşśȱŠ Ǽȱ 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.) ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŘŘȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ŽŸ’œ’˜—œȱ˜ȱ ȱ’—ȱ‘ŽȱŽ•Š›ŽȱŽ˜›–ȱ’••ȱǻŗşşŜȱŠ Ǽȱ 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. Ž—¢ȱ ȱ˜ȱ—˜Œž–Ž—Žȱ˜›”Ž›œȱ 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. ’œšžŠ•’’Žȱ —Œ˜–Žȱ 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. ›˜ŠŽ—ȱ —Œ˜–ŽȱœŽȱ’—ȱ ȱ‘ŠœŽȬ˜žȱ 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 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. ••˜ ȱŠŽȱŽ•Š›Žȱ›˜›Š–œȱ˜ȱ˜ž—ȱ ȱ 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 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Řřȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ (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. Ž—¢’—ȱ›Ž’ȱŠœŽȱ˜—ȱ›’˜›ȱ•Š’–œȱǻŗşşŝȱŠ œǼȱ 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. ŽžŒ’˜—ȱ˜ȱŠ››’ŠŽȱŽ—Š•¢ȱŠ—ȱ’–™•’’ŒŠ’˜—ȱ˜ȱ‘Žȱ ȱ ǻŘŖŖŗȱŠ Ǽȱ 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. —’˜›–ȱŽ’—’’˜—ȱ˜ȱŠȱ‘’•ȱŠ—ȱ˜–‹ŠȱŠ¢ȱǻŘŖŖŚȱŠ Ǽȱ 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 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). ž››’ŒŠ—ŽȱŽ•’ŽȱǻŘŖŖśȱŠ Ǽȱ 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŘŚȱ ȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ¡Ž—œ’˜—ȱ˜ȱ˜–‹ŠȱŠ¢ȱǭȱ ž››’ŒŠ—ŽȱŽ•’ŽȱǻŘŖŖśȱŠ Ǽȱ 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. Extension of Combat Pay (2006 Law) The Tax Relief and Health Care Act of 2006 (P.L. 109-432) extended the option to include combat pay for calculating the credit through tax year 2007. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Řśȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ ™™Ž—’¡ȱǯ ’œ˜›¢ȱ˜ȱ‘Žȱ ȱŠ›Š–ŽŽ›œȱ 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 been modified through changes in eligibility and in the values of the parameters used to calculate the credit. Table B-1 shows the changes to the parameters for the EITC for tax years 1975 through 2008. . EITC Parameters, 1975-2008 Table B-1 Credit Rate (%) Maximum Earned Income Maximum Credita Phase-Out Rate (%) Phase-Out Income Level Income Where 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 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 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŘŜȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ Credit Rate (%) Maximum Earned Income Maximum Credita Phase-Out Rate (%) Phase-Out Income Level Income Where EITC=$0 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 2008 34.0 8,580 2,917 15.98 15,740d 33,995d 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 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 2008 40.0 12,060 4,824 21.06 15,740d 38,646d 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 7.65 5,950b 10,750b 2001 7.65 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ 4,750 364 Řŝȱ ‘ŽȱŠ›—Žȱ —Œ˜–ŽȱŠ¡ȱ›Ž’ȱǻ ǼDZȱ—ȱŸŽ›Ÿ’Ž ȱ ȱ Credit Rate (%) Maximum Earned Income Maximum Credita Phase-Out Rate (%) Phase-Out Income Level Income Where EITC=$0 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 2008 7.65 5,720 438 7.65 7,160d 12,880d 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. d. For this tax year, the phase-out income level for a married couple filing a joint tax return is $3,000 higher than shown in the table. Source: ž‘˜›ȱ˜—ŠŒȱ —˜›–Š’˜—ȱ Christine Scott Specialist in Social Policy cscott@crs.loc.gov, 7-7366 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŘŞȱ