In Focus: Refundable Tax Credits

Jan 7, 2016  |  PERMALINK »

All Workers Should Benefit from the EITC

By Nune Phillips

In December, Congress passed a budget that includes tax provisions to support families’ economic security. As CLASP highlighted, Congress made permanent increases to the Earned Income Tax Credit (EITC) for certain families with children, reduced the marriage penalty for those claiming the EITC, and lowered the income threshold for workers to qualify for the refundable Child Tax Credit (CTC). This marks a major victory for low-income working families, but there is much left to be done. Congress should build on these steps by extending tax benefits to workers without children.

The EITC is essential to poverty reduction; it incentivizes workforce participation for impoverished adults. However, childless adults (including noncustodial parents) receive only a modest EITC, and those under age 25 and over age 64 are ineligible for the credit. The maximum EITC for childless adults is $500; however, the Center on Budget and Policy Priorities notes that these workers receive just $270 on average. Eligibility phases out as income increases. As highlighted in President Obama’s expansion proposal, childless adult workers who reach the federal poverty line (FPL) receive just half of the EITC credit, and those working full time in minimum-wage jobs receive less than $25.

Expanding the tax credit for childless adults and modifying the age limit will help individuals who cannot find full-time work. Further, it will encourage young adults to create the foundation for a lifetime of workforce participation. The president’s proposal would increase the maximum credit to $1000, increase the eligibility threshold to 150 percent of FPL, and expand the age qualification to 21-66 years old. These changes would benefit an additional 8.5 million workers who would become eligible for the EITC, including millions in low-wage industries such as retail, restaurants, sanitation, and labor.

New York City is currently implementing a pilot project, Paycheck Plus, to measure the effects of an expanded EITC for childless workers earning less than $30,000 per year. The project includes 6,000 single adult participants, half of whom were selected at random to receive a bonus EITC credit. The bonus group, which is eligible for a $2,000 maximum credit for up to three years, reflects a mix of workers; 12 percent are noncustodial parents and 18 percent have previously been incarcerated. Early results from MDRC indicate positive effects. For the 2015 tax season, 46 percent of participants were eligible for a bonus and the average benefit was roughly $1,400. MDRC estimates that 65 percent of those participating worked in 2014; the employment rate change is not yet known, but it is expected that participation in the Paycheck Plus program resulted in an increase. A similar demonstration is underway in Atlanta. 

Proposals to expand the EITC to childless workers have received bi-partisan support; however, Congress has yet to act to implement the change. House Speaker Paul Ryan (R-WI) has previously called for such an expansion and is uniquely positioned to advance legislation as part of his poverty agenda in 2016.  We look forward to working with Congress expand the EITC to childless workers, including young adults and non-custodial parents.

Dec 18, 2015  |  PERMALINK »

Permanent Improvements to EITC and CTC, but More to be Done

By Helly Lee and Elizabeth Lower-Basch

Earlier this week, the House of Representatives passed a major tax bill that extends many expiring tax provisions, making some of them permanent. This bill is expected to pass the Senate along with the omnibus spending bill and be signed into law next week.

In a major victory for low-income working families and students the bill makes permanent what were previously time-limited extensions of improvements to three critical refundable tax credits -- the Earned Income Tax Credit (EITC), Child Tax Credit (CTC) and American Opportunity Tax Credit (AOTC). These improvements, originally passed in the Recovery Act of 2009, would otherwise have expired in 2017, pushing millions more families into, or deeper into, poverty. In 2014, the EITC and CTC reduced overall poverty by 3.1 percentage points and child poverty by a remarkable 7.1 percentage points.  The AOTC benefits students and their parents by making college more affordable.

Specifically, the bill makes permanent a modestly larger EITC for families with three or more children, marriage penalty relief by increasing the income phase-out range for married couples filing jointly, and it allows low-income workers who earn at least $3,000 to begin to qualify for the refundable CTC. Without legislation, these improvements would have expired at the end of 2017, and the AOTC would have been replaced by the non-refundable HOPE credit. (Non-refundable credits are not available to taxpayers who earn too little to owe federal income taxes.) For example, if the improvements to the CTC had been allowed to expire, a single mother of two children working full-time at the minimum wage would not have received any benefit from the CTC, because all of her earnings would have been under the threshold at which low-wage workers begin to qualify.

Unfortunately, the bill also includes some provisions that may make it more burdensome for non-citizens to obtain Individual Taxpayer Identification Numbers (ITINs) in order to file taxes. CLASP will monitor the implementation of these provisions. The bill also singles out tax filers with new social security numbers and prohibits them from retroactively claiming the EITC.  In addition, the bill would prevent all EITC and CTC recipients from receiving their tax refunds prior to February 15. These provisions unfairly target low-income workers for higher levels of scrutiny than other taxpayers, and they disadvantage children in low-income working families who are crucial to the nation’s future and who benefit from the economic stability provided by the credits.  Moreover, the bill fails to give the Internal Revenue Service authority to regulate paid tax preparers, which would be more effective in controlling fraud and abuse.  The bill does contain some helpful provisions, such as making higher education institutions provide students with forms showing the amount they paid towards tuition and fees, not just the amount billed.

In addition, we continue to urge Congress to expand the EITC for childless workers, which has received strong bi-partisan support. Under current law, workers without children are only eligible for a nominal credit and are denied the EITC entirely if they are under the age of 25. This has a significant impact on young, low-wage workers who are struggling to make ends meet. The expansion of the EITC for childless workers will also have a significant impact on low-wage workers of color. Of the 13.5 million childless workers who stand to benefit from an expansion of EITC, nearly 40 percent are Latino (3.3 million) and African American (2 million).

While the official estimated cost of the overall tax package is a hard to conceive $622 billion dollars, this figure is misleading; most of the business tax provisions in the bill have been extended year after year, without being paid for. In the absence of this bill, there was a real risk that the business tax provisions would have been extended, while low-income families were left out in the cold. While ultimately we will need tax reform that brings in needed revenue in order to adequately fund critical programs, this package is an important step forward for low-income families and students.   

Nov 30, 2015  |  PERMALINK »

Now is the Time: Congress Must Protect EITC and CTC For All Working Families

By Helly Lee

The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are critical supports for low wage earners and families living in poverty.  Both are refundable credits, meaning that workers who earn too little to owe federal income taxes can still receive the value of the credit.  Both have been shown to significantly reduce poverty. In 2014, the EITC and CTC reduced overall poverty by 3.1 percentage points and child poverty by a remarkable 7.1 percentage points. In addition to being critical poverty reduction programs, the EITC and CTC have been shown to promote work and support children’s development.

Critical improvements to the EITC and CTC are set to expire at the end of 2017. These provisions include marriage penalty relief, a modestly larger EITC for families with three or more children, and allowing low-income workers to qualify for the refundable CTC starting at $3,000 (rather than the $14,700 that would otherwise be needed to qualify).  These changes help ensure that work pays for the lowest-income workers. More than 16 million people in working families, including 8 million children would fall into – or deeper into – poverty if policymakers fail to save these critical provisions.

As Congress considers corporate tax extenders in the upcoming weeks, possibly as a part of an omnibus spending bill at the end of the year, it is essential that extending the improvements to the EITC and CTC be part of that deal. While the credits have historically received bi-partisan support, earlier this year the House Ways and Means Committee moved other tax extenders without these provisions.  It is unconscionable to provide tax breaks benefitting large corporations while leaving out the tax credits that are critical to helping low-income families and children. In addition, Congress must not do any harm toward immigrant families and their children by changing eligibility requirements for the CTC and EITC or make it impossible for workers to file and pay their taxes by imposing unreasonable requirements for obtaining their Individual Tax ID Number (ITIN).  Efforts to change eligibility requirements will devastate up to 4.5 million children in low-income working families.

The time is now for Congress to make the improvements to the EITC and CTC permanent and to ensure that all working families are able to access these critical credits. 

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