Issue #2, Winter 2007 image  
RuFES Round-up title  
 

Action-Learning for the Rural Family Economic Success (RuFES) Alumni Network
Sponsored by the Annie E. Casey FoundationbulletCoordinated by the Aspen Institute Community Strategies Group

 
 
 
 
 
 

EITC 101: What everyone needs to know about the EITC

What is the EITC?

The Earned Income Tax Credit (EITC) is a refundable tax credit for low-income families that financially rewards work. It puts more money in the pockets of families by increasing their refund or reducing the taxes they owe.

It is the largest and most successful anti-poverty program in America—far larger than the federal welfare (TANF) program. More than 21 million workers received $39 billion in EITC payments in 2004.

It is also an often-missed rural development opportunity. Boosting use of the EITC can have big effects on rural economies.

How did it get started?

The EITC was proposed and passed in 1975 during President Ford’s administration. Because it makes work pay for millions of low-income families, it gained wide support. The EITC has been renewed or expanded with broad bipartisan support in every administration since its adoption.

Who qualifies for the EITC?

Generally, workers who:

  • Have earned income from employment or self-employment
  • Have a social security number
  • Do not file their taxes as “married filing separately”
  • Are a US citizen, a resident alien or married to and file taxes with a citizen or resident alien
  • Have a qualifying dependent child, or if child-free, are between the ages of 25 and 65
  • Are not claimed as a dependent on someone else’s tax return
  • Meet the income guidelines (up to $38,348 for a two-parent family)

How does it work?

  • The EITC is refundable even if a family owes no taxes, so it works even for very low-income families.
  • To claim the EITC, families with children must file a federal tax return using Form 1040 or 1040A and Schedule EIC. Families without children may also use form 1040EZ.
  • Families with and without children can claim the EITC. The largest benefits go to families with children.
  • The maximum benefit for the 2006 tax year is $4,536—for a two-parent/two-child family earning $16,000 per year.
  • The EITC gradually phases out for families with higher incomes, ending at $38,348 for a two-parent family.
  • A family that qualified but did not file for the EITC in any given year can go back up to three years and amend their return—potentially receiving as much as $13,000 if they file for three years all at once.
  • Though seldom used, families can claim “Advance EITC” payments and receive up to 60% of their expected EITC with their regular paychecks rather than in a lump sum at tax time.

What difference does it make?

Nationally, the EITC lifts more than five million people above the federal poverty line, half of whom are children. For millions of families, it makes work more financially rewarding than welfare. This makes it more likely that full-time low-wage workers can earn enough to meet basic needs without relying on public benefit programs.

Since low-income families spend most of their money locally, the EITC pumps billions of dollars into the economies of low-income communities.  The effects are especially big in rural areas where many jobs pay low-wages and there are fewer earning opportunities available. As a result, the EITC is very important to the economies of rural communities.

 

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