In Focus: Refundable Tax Credits

Jul 23, 2014  |  PERMALINK »

Education Tax Credits Bill Takes a Partisan Turn on Way to House Floor

By Elizabeth Lower-Basch

This week, the House of Representatives is expected to take up H.R. 3393, the Student and Family Tax Simplification Act.  When this bill was introduced last fall by Reps. Diane Black (R-TN) and Danny Davis (D-IL) , CLASP along with our partners in the Higher Education Tax Reform Consortium had applauded it  as an important step forward in simplifying the multiple tax benefits that support higher education and in making these credits more useful to low-income students.

In particular, the bill includes a number of provisions consistent with the Consortium’s recommendations:

  • It would make permanent the partially refundable American Opportunity Tax Credit (AOTC), which is currently scheduled to revert to the non-refundable Hope credit at the end of 2017.  It would also index the value of the AOTC to inflation, starting in 2018. 
  • It would Increase the portion of the credit that is refundable. Under current law, students who don’t earn enough to owe federal income taxes can receive only up to 40 percent of the AOTC as a refundable credit.  In other words, students who qualify for the maximum $2,500 credit can receive up to $1,000 as a refundable credit.  The bill would make the first $1,500 of the credit refundable.  This would particularly help students attending the lowest-cost institutions, such as community colleges, who now do not receive even the full $1,000 refundable credit if they have less than $4,000 in qualified expenses. 
  • It would improve coordination between Pell grants and the AOTC, and would ensure that Pell grants are never counted as taxable income, even when they are used for educational costs other than tuition.   A similar proposal is in President Obama’s budget. 
  • Under the original bill, the costs of the expanded refundabilty would have been offset by lowering the income eligibility limits for the AOTC and by eliminating the Lifetime Learning Credit.

Read more>>

Jul 23, 2014  |  PERMALINK »

Proposed Changes to Child Tax Credit Will Hurt Poor Children and Families for Years to Come

By Randi Hall

UPDATE: On July 25, 2014, the House of Representatives debated on H.R. 4935 and passed the bill with a vote of 237 to 173. The Senate is unlikely to take up the bill but its passage in the House shows that there’s much more to be done to protect low-income families and ensure their access to supports. CLASP will continue to monitor and advocate for policies that support low-income families, such as a permanent extension of the 2009 improvements to the CTC and EITC.

This week the House of Representatives is set to consider the Child Tax Credit Improvement Act of 2014 (H.R. 4935). Sponsored by Congresswoman Lynn Jenkins (R-KS), the bill would permanently expand eligibility of the Child Tax Credit (CTC) to higher income families, but would not extend improvements made in 2009 that benefit working poor families.  At the same time, the act would institute taxpayer identification requirements needed to claim portions of the credit, restricting access for millions of citizen children. These proposed changes to the CTC are regressive and largely disregard the needs of low-income families and the children this credit supports.

Specifically, the Child Tax Credit Improvement Act would:

  • Institute new phase-out amounts of $150,000 for married couples filing joint returns and $75,000 for all other taxpayers, changing the current category limits of $110,000 for joint returns and $55,000 for married individuals filing separate returns. The $75,000 limit set for individual taxpayers would be indexed to inflation and the joint return limit would be two times this adjusted amount.
  • Index the maximum CTC amount to inflation, protecting the value of the credit over time.
  • Fail to make permanent the improvements to the CTC that were first passed in 2009 under the American Recovery and Reinvestment Act (ARRA) which made more working-poor families eligible for the credit  and increased the amounts that some low income families may receive. These improvements are currently scheduled to expire in 2017.
  • Require a parent to file taxes with a Social Security Number (SSN) in order to claim the refundable portion of the CTC for their qualifying children. This means that parents who file with an IRS-issued Individual Tax Identification Number (ITIN), the majority of whom are immigrant workers, would be prevented from accessing the full CTC for their children. According to the National Immigration Law Center, it is estimated that up to 4.5 million U.S. citizen children from low-income families would be denied access to the CTC through the provisions in this bill.

H.R. 4935 would extend eligibility of the CTC to over 3 million additional beneficiaries with higher incomes, while making no effort to extend improvements to beneficiaries on the lower end of the income scale. For example, couples with two children making between $150,000 and $205,000 would become newly eligible for maximum amount of the CTC through this bill, while if the 2009 ARRA improvements are allowed to expire in 2017, a single mother with two children who works full time at minimum wage earning $14,500 would lose $1,725 in 2018. In 2011, over 50% of families receiving the refundable CTC earned less than $25,000.

The Child Tax Credit was created to recognize the additional costs that parents incur. It is wrong to deny this credit to those working poor families who struggle the most to meet their families’ basic needs. The CTC, in combination with the Earned Income Tax Credit, kept an estimated 10.1 million people, including 5.3 million children, out of poverty in 2012. Congress’ first priority in improving the CTC should be to make permanent the 2009 changes that allow children in working-poor families to benefit from this key credit. 

May 28, 2014  |  PERMALINK »

New York’s Paycheck Plus Pilot Can Inform EITC Expansion Policies

By Helly Lee

Recently, MDRC released a brief providing more details about their pilot to test an expanded Earned Income Tax credit (EITC) in New York.  The Paycheck Plus pilot tests a new, EITC-like earnings supplement for low-income workers.   Targeting those earning between $6,667 and $18,000, the pilot recruited over 6,000 individuals, half of whom were randomly selected to receive a supplement of up to $2,000 a year for three years (for earnings from tax years 2014, 2015, and 2016).  The other half of the study participants form a control group that is not eligible for the supplement.

The Paycheck Plus pilot sought to include participants with significant financial challenges, including non-custodial parents, those who were formerly incarcerated, and individuals with little or no earnings.  The supplement will only be available to those participants in the experiment group who work and file taxes.  A select subset of individuals eligible for the Paycheck Plus supplement will also be given referrals to employment services.  These efforts will assess whether combining the supplement with assistance produces larger effects.  The pilot project will be implemented through 2017.

Pilots like Paycheck Plus can help inform future policymaking by showing the impact of enhanced EITC proposals for low-wage earners.  The pilots provide a unique opportunity to analyze the effect a policy can have on a specific population and gather best practices that may be scaled up to a national level. 

Federal policymakers are recognizing more and more the importance of expanding the EITC to better serve low-wage workers.  Recently, President Obama proposed expanding and strengthening the EITC for childless adults, including modifying the age limits. In addition, three congressional proposals (the Working Families Tax Relief Act of 2013; the Earned Income Tax Credit Improvement and Simplification Act of 2013; and the EITC for Childless Workers Act of 2014) have been introduced to strengthen the EITC for childless workers.   These proposals require Congressional action in future tax policy debates, which can be informed by lessons learned from local pilots.

The Earned Income Tax Credit (EITC) is known to have long-lasting benefits for low-wage workers and their families.  As we’ve written before, the EITC is one of the nation’s largest and most effective anti-poverty programs.  In 2012, the EITC lifted 6.5 million people, including 3.3 million children, out of poverty and made work pay for low-earning parents.  However, the EITC offers less help for adults without dependent children, including non-custodial parents.  Their average credit is about $270—less than one-tenth of the average credit for filers with children.  An estimated 5.8 million workers under 25 and over 64 are ineligible simply because of their age.

Childless adult workers are the only group taxed into poverty.  In 2012, federal income and payroll taxes pushed 1.2 million childless workers into poverty and another 5.8 million deeper into poverty.  Expanding the EITC for this population will reduce poverty among childless workers and incentivize work.  We look forward to learning from Paycheck Plus as it is implemented, and we will continue to advocate for national policies that better support low-wage workers. 

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