In Focus: Refundable Tax Credits

Jan 22, 2015  |  PERMALINK »

State of the Union Address Reiterates Need for Improving Tax Credits

By Helly Lee

In Tuesday’s State of the Union Address, President Obama highlighted the importance of “helping folks afford child care, college, health care, a home, retirement [by] lowering the taxes of working families, and putting thousands of dollars back into their pockets each year.”

The president reiterated his commitment to making permanent the 2009 Recovery Act improvements to the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) that are set to expire in 2017,  as well as expanding the EITC for workers without children and noncustodial parents.

The president’s efforts to lower the taxes of working individuals to help them support their families are important and will ensure that future tax policies do not leave out middle- and low-wage earners. The EITC and CTC have been shown to effectively help lift families out of poverty, and more needs to be done to strengthen these credits permanently for working families.  The Recovery Act improvements to the EITC added a “third tier” for families with more than two children that increases the credit by up to an additional $672. Another EITC improvement is a reduced “marriage penalty” for some two-earner couples. Together, these EITC improvements lifted nearly 600,000 people out of poverty and reduced the severity of poverty for roughly 10 million people.

The Recovery Act improvements also lowered the CTC’s earnings exclusion so that all but the first $3,000 in earnings count toward the determination of the family’s CTC.  Before this change, the earnings exclusion was set to rise to $12,550, which would deny the full value of the credit to the lowest income working families, who need it the most. This improvement allows more low-income families to get a larger credit and millions more to qualify for a partial credit. Should Congress allow the CTC and the EITC improvements to expire, it will push 16 million people into -- or deeper into --poverty.

The president’s plan includes expanding the EITC for workers without children.  This is identical to his proposal from last year, which was also adopted by Representative Paul Ryan (R-WI) as part of his budget proposal. This will have a significant impact on young workers, non-custodial parents, and workers nearing retirement. Under current law, low-income workers without children receive little or nothing from the EITC. As a result, childless workers are the only group of people that the federal tax system taxes deeper into poverty. Expansion of the EITC for childless workers has garnered bipartisan support because it has proven to promote work, alleviate poverty and supplement low wages.  

President Obama spoke in depth about the importance of affordable and quality child care and his plan to simplify and expand the child and dependent care tax credit up to $3,000 per child annually. Under this proposal, the maximum child care credit would cover 50% of child care expenses up to $6,000 for children under the age of 5, and it would be available to many more middle-income families. This tax credit would remain non-refundable, which means that it would not benefit families whose incomes are too low to owe federal income taxes. However, in the State of the Union address, the president also called for additional funding to expand the number of children who are able to attend affordable, high-quality child care.

President Obama also proposed consolidating a number of tax benefits for higher education into an improved and permanent American Opportunity Tax Credit (AOTC), which would be made more refundable and available for the first time to students attending college less than half time.  Finally, the president proposed a new tax credit for dual-income married couples, recognizing that work expenses can reduce the benefits of employment for second earners.

CLASP looks forward to working with the Administration and Congress in the upcoming year on advancing common-sense policies, including strengthening refundable tax credits that will support working individuals and families.

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. 

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