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. 

Sep 7, 2016  |  PERMALINK »

Labor Day underscores the importance of rewarding work

By Jessica Gehr

The Earned Income Tax Credit (EITC) is one of the most important anti-poverty programs in the country and benefited over 27 million people in 2014. The credit rewards work and helps low- and moderate-income working families save, pay bills, or cover other expenses such as child care. Many studies have proven that working-family tax credits encourage work. The EITC is especially effective at encouraging work among single mothers earning low wages. However, workers without dependent children, including non-custodial parents, receive only a small EITC, which phases out before a single worker earns enough to escape poverty; thus, childless workers are the only group pushed into poverty by federal taxes. Congress needs to strengthen the EITC to encourage and reward work for childless workers.

Proposals to expand the EITC for childless workers have won bipartisan support, including President Obama and Speaker Paul Ryan (R-WI). Senators Sherrod Brown (D-OH), Tammy Baldwin (D-WI) and Cory Booker (D-NJ), along with Representative Richard Neal (D-MA) and others, have introduced legislation that would expand the EITC.

According to a White House report, expanding the EITC would benefit 13.5 million workers, a diverse group encompassing:

Young workers: All expansion proposals include lowering the age of eligibility for the credit from 25 to 21, which would benefit 3.3 million young adults. Despite the misconception that young people ages 21-24 are going to school, perhaps working part-time and being supported financially by their parents, 13 million young adults in their early 20s are employed, and 62 percent are working full-time. Expanding the EITC would give young people the boost they need to build a stronger financial future.

Older workers: Older adults, particularly older women, would also benefit from a strengthened EITC. According to the National Women’s Law Center, women approaching retirement constitute two-thirds of the older workers who would benefit from expanding the EITC. Proposals by President Obama and Senators Baldwin and Booker would modernize the EITC age limit to include workers who are 65 and 66, reflecting the age increase for collecting full Social Security retirement benefits.

Non-custodial parents: According to the White House report, 1.5 million non-custodial parents would benefit from the proposed EITC expansion. By boosting these parents’ incomes–and encouraging work–the expansion may benefit their children as well. Increasing the EITC would help these non-custodial parents pay child support, which in turn promotes stronger family connections.

Veterans: The Center on Budget and Policy Priorities estimates that approximately 630,000 veterans would benefit from the expansion.

Extensive research has proven the effectiveness of the EITC on short- and long-term outcomes. Policymakers on both sides of the aisle have expressed support for expanding the EITC, and it is time to turn this support into action. Labor Day is a traditional time for rhetoric about the importance of work. Congress should make that rhetoric a reality by encouraging and rewarding work by expanding the EITC to childless workers.

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