Tax Credits for Working Families: Earned Income Tax Credit (EITC)

Mary Fairchild, Presenter Caitlin Rossiter, Researcher What is the Federal Earned Income Tax Credit? • Enacted in 1975, the federal EITC is a refundable credit • A refundable credit reduces an individual's tax liability below zero • A tax return must be filed in order to claim the EITC • The credit amount depends on the taxpayer’s earned income, number of qualifying children, and marital status • In TY 2009, more than 26 million people received nearly $59 million in refundable credit 2010 Federal EITC Eligibility Guidelines Individuals Three+ Children Claiming EITC No Children One Child Two Children Maximum Earned Income $13,460 $35,535 $40,363 $43,352

Maximum EITC $457 $3,050 $5,036 $5,666

Married Couples Claiming EITC Three+ Children No Children One Child Two Children Maximum Earned Income $18,470 $40,545 $45,373 $48,362 Maximum EITC $457 $3,050 $5,036 $5,666 What is a State Earned Income Tax Credit? • 25 states and the District of Columbia offer an earned income tax credit • Like the federal EITC, a tax return must be filed with the state department of revenue • Most state earned income tax credits are refundable Earned Income Tax Credits: Four Key Points 1. Work Incentive Recipients must work to qualify for the tax credit 2. Child Care EITC decreases the amount of money owed in taxes per qualifying child 3. Financial Assets and Savings EITC refund may be deposited in more than one account for savings or retirement 4. Refund Anticipation Loans (RALs) offered by commercial tax preparation services to expedite the refund process Outreach: Free Earned Income Tax Credit Services • An estimated 20 percent to 25 percent of eligible workers do not claim earned income tax credits • Outreach campaigns aim to increase the number of people who claim earned income tax credits • Campaigns focus on increasing consumer knowledge about EITC, VITA sites, and additional free tax preparation services Examples of State and Local EITC Outreach Campaigns

• : Tax Help Colorado is a program that uses colleges to provide free income-tax return preparation services to low-income working families  In 2010, Tax Help Colorado helped 4,086 taxpayers at 11 sites throughout Colorado, netting $8.3 million in refunds • : An outreach campaign run by Iowans for Social and Economic Development (ISED) focuses on encouraging eligible families to file for the federal EITC  The campaign resulted in a 30 percent increase in the number of EITC filings, representing a $2.6 million increase in refunds to Iowa's working families • Washington: The Department of Social and Health Services created a toll-free hotline to provide eligibility information and referrals to tax providers  More than 350,000 people have received $600 million in refunds Examples of Nonprofit and Private Sector EITC Outreach Campaigns • AARP: AARP Tax Aid Assistance is a free, volunteer-run tax preparation and assistance program • Intuit: Online support is offered by Intuit and the Intuit Financial Freedom Foundation Sponsor the Intuit Tax Freedom Project The Intuit Tax Freedom Project provides free online tax preparation services and electronic filing options to working people • Walmart: The Walmart Foundation funds nonprofit organizations such as the United Way and One Economy to expand EITC outreach Commonly Asked Questions about the Earned Income Tax Credit • Is EITC vulnerable to fraud?  The potential for fraud is minimal--tax filers must have a valid social security number to file taxes • What is the potential for error in filing for EITC?  The potential for error in filing for the EITC is approximately 15 percent  Most common inaccuracies occur in taxpayer-provided information, filing status errors, and confusion about IRS requirements for qualifying children • How are EITC refunds spent?  EITC refunds are commonly used for rent, child care, school loans, groceries, and savings accounts • Is EITC an economic development tool?  Can provide both immediate and long-term economic stimulus to states Recently Enacted EITC Legislation • : establishes an EITC equal to 30 percent of the federal credit • Hawaii: appropriates $198,000 to expand EITC outreach in Honolulu County • : exempts the federal EITC from bankruptcy proceedings • Iowa: increases the state EITC from seven percent to 10 percent of the federal credit-- Vetoed • : expands the state EITC from 17 percent to 18 percent of the federal credit • : requires the Comptroller to publish eligibility information and mail the information to all employers in the state; requires an employer to provide notification to an employee who may be eligible for the credit • : reduces the state EITC from 25 to 20 percent of the federal credit • : appropriates $185,725 to the Virginia Community Action Partnership to support the Virginia Earned Income Tax Coalition, provide grants to local organizations to offer outreach, education and tax preparation services to citizens who may be eligible for the federal EITC Ronald Reagan expanded the federal EITC in 1986 calling it “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress” Earned Income Tax Credit (EITC) Resources • Internal Revenue Service (www.irs.gov) Find a VITA site 1-800-906-9887 • National Community Tax Coalition (http://tax- coalition.org/)  EITC Advocacy Toolkit • National Conference of State Legislatures (www.ncsl.org) Tax Credits for Working Families: Earned Income Tax Credit (EITC) Working Families Overview: A Legislator’s Tool Kit