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. 

Mar 13, 2015  |  PERMALINK »

House and Senate Members Join Efforts to Strengthen Critical Tax Credits

By Helly Lee

Refundable tax credits, such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are a critical support for low- and moderate-income working families. They encourage work and help families lift themselves out of poverty by offsetting some of the rising costs of raising children. Research has shown that these tax credits have long-lasting benefits, such as higher educational achievement among children, as well as increased work effort and earnings in adulthood.  However, unless Congress takes action, in a few years, some of the lowest-income working families will get less benefit from these credits.  If Congress undertakes tax reform this year, it is critical that efforts to make permanent and strengthen credits that support working families are a priority.

Last week, Representatives Lloyd Doggett (TX), Richard Neal (MA), Rosa DeLauro (CT), and Sander Levin (MI) joined Senators Dick Durbin (IL), Chuck Schumer (NY), Patty Murray (WA), Sherrod Brown (OH) and Michael Bennet (CO) to unveil a package of proposals to support working families. These bills stake out an agenda as Congress begins working on tax reform.

In the House, Congressman Neal’s Earned Income Tax Credit Improvement and Simplification Act, H.R. 902 makes permanent key improvements to the EITC included in the 2009 American Recovery and Reinvestment Act (ARRA), which expanded the EITC for families with three or more children. These larger families can now receive up to $672 more than they would have without the ARRA change, which is set to expire in 2017. It also expanded marriage penalty relief in the EITC, allowing married couples to receive larger benefits at modestly higher income levels. These two improvements aided an estimated 600,000 people in lifting themselves out of poverty and reduced the severity of poverty for approximately 10 million people in 2013.

H.R. 902 would also expand EITC for childless workers – a provision that has gained strong bipartisan support. Low-wage workers without children are the only category of people taxed further into poverty. The current EITC, which offers only modest credits to childless workers, is not enough to lift them out of poverty as it does for millions of families with children.

Congresswoman DeLauro’s bill, the Child Tax Credit Permanency Act, H.R. 1286, would make permanent the improvements that ARRA made to the Child Tax Credit (CTC) and adjust the CTC to inflation. Before ARRA, the minimum income amount used to calculate the refundable portion of the CTC was set to increase to $12,550. This meant that a family needed to make at least that amount to be eligible; however, ARRA lowered that threshold to $3,000, allowing very low income families access to the credit. Much is at stake for Congress to address these two important tax credits. Unless Congress acts, key improvements in the EITC and CTC are set to expire in 2017, which could cause 16 million people in low- and moderate-income working families to fall into – or deeper into – poverty.

Senators Brown and Durbin announced the Working Families Tax Relief Act,  which expands and extends the EITC and CTC in addition to making the Recovery Act expansions on both credits permanent.  This bill was introduced in the last Congress, and will likely be re-introduced in the coming weeks. Like Congressman Neal’s H.R. 902, this bill would also expand the EITC for childless workers and index the CTC to inflation.

Congressman Doggett’s bill, the American Opportunity Tax Credit Act, H.R. 1260, includes improvements to the American Opportunity Tax Credit (AOTC), which supports families to offset the rising cost of college by increasing the tax credit they can receive per student. The bill makes the AOTC permanent and consolidates it with the Lifetime Learning Credit into one simplified AOTC that would provide families up to $3,000 per year,per eligible student, an increase from the current value of $2,500, with a maximum refundable credit of $1,500. It also replaces the number of years a student can use the AOTC with a $15,000 lifetime limit cap and improves the coordination between Pell Grant and AOTC. Furthermore, H.R. 1260 would expand eligibility for part-time students and allow families earning up to $200,000 per year to be eligible (or, $100,000 for a single filer), an increase from the current level of $160,000 for joint filers and $80,000 for single filers. Senator Schumer has announced a similar proposal to increase and expand the AOTC.

Senators Murray and Bennet also joined in introducing the Helping Working Families Afford Child Care Act, which makes changes to the Child Dependent Care Tax Credit (CDCTC), which is intended to defray the cost of child care for working families. The bill would increase the amount of child care expenses families can count toward the credit and make the credit refundable. It also phases out eligibility for the credit so that higher-income families would receive less credit. Other CDCTC bills have been introduced in the Senate, but were not a part of this package announcement.

Senator Murray also introduced the 21st Century Worker Tax Cut Act, which would create a new tax credit for households with two working parents. Couples must have earned income, file taxes jointly, and have at least one child under age 12 to be eligible. Senator Murray’s proposal includes a 10 percent credit on up to $10,000 of the secondary earner’s income, allowing qualified families to reduce their income tax by up to $1,000.

The Obama Administration supports efforts to make permanent key improvements and strengthen critical tax credits. President Obama’s 2016 budget proposed a number of the improvements echoed in the proposed package of tax credits to support working families. The president’s budget also proposed to create a new $500 second-earner tax credit, expand the EITC for workers without children and non-custodial parents, and make the Recovery Act improvements permanent. In addition, the president’s budget would increase the maximum Child and Dependent Care Tax Credit (CDCTC) for families with children under age five and make the credit available to families with incomes up to $120,000. Finally, the president’s budget proposes to make the AOTC permanent, increase the refundable portion to $1,500, and expand eligibility to include part-time students.

On the Republican side, Senators Rubio (FL) and Lee (UT) also released a framework for a tax reform they promote as being pro-family.  However, the new child credit they would create is only partially refundable, which would leave out many of the lowest-income families.  As Congress begins to discuss tax reform, it is important to ensure that low-income working families are not left behind.

These efforts are a critical starting point in the coming months as members of Congress discuss tax policies. The lives of millions of hard-working Americans will be affected by the actions, or inactions, of Congress to support these working-family tax credits.

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