Refundable Tax Credits
Income and work supports may be provided through the tax system as well as through benefit programs. The most important tax credits for low-income households are the refundable Earned Income Tax Credit and the Child Tax Credit (credits that together lifted an estimated 8.7 million people out of poverty in 2011), and the partially refundable American Opportunity Tax Credit, which reduces the cost of postsecondary education. These credits were improved by the 2009 American Recovery and Reinvestment Act, and these improvements were extended through 2018 by the American Taxpayer Relief Act of 2012.
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.
- Helly Lee and Andrea Barnes | Sep 16, 2014 EITC Expansion Proposals: What’s at Stake for Young Workers
- Feb 01, 2013 Reforming Student Aid
- Elizabeth Lower-Basch | Aug 07, 2013 Poverty Trends: Declining Wages Require Growing Income Supports
- Elizabeth Lower-Basch and Julie Strawn | Apr 15, 2013 Comments on Education and Family Tax Benefits
- Helly Lee | Feb 04, 2013 Research Shows Long-Lasting Benefits of EITC
- CLASP | Sep 16, 2014 New Census Data Tell Us That Poverty Fell in 2013
- Helly Lee and Andrea Barnes | Sep 16, 2014 EITC Expansion Proposals: What's at Stake for Young Workers
- C-PES | Jun 19, 2014 Help When It's Needed: Advancing the AOTC
- The Reimagining Aid Design and Delivery (RADD) Consortium for Higher Education Tax Reform | Nov 21, 2013 Higher Education Tax Reform: A Shared Agenda for Increasing College Affordability, Access, and Success
- CLASP | Sep 18, 2013 Child Poverty in the U.S.: What New Census Data Tell Us About Our Youngest Children