What is the federal EITC?

• The Earned Income Tax Credit (EITC) is a federal tax credit for low-income working individuals and families. It is intended to reduce the tax burden on low-income workers, supplement their wages, and assist in the welfare-to-work transition. Even workers whose income is too small to pay taxes can receive a refund though the EITC, $41.8 billion to 22 million low-income families in tax year 2005.¹
  
  
• The EITC is one of the most successful federal anti-poverty programs ever developed. The impact of the EITC on a working family’s income can be considerable. For example, in 2005, a single parent raising two or more children and earning between $11,000 and $14,400 is eligible for the maximum EITC of $4,400—a full 30 to 40 percent increase in the family’s income. Taxpayers with one child can claim a maximum EITC of $2,662. Claiming the Child Tax Credit can provide up to $1,000 per child to eligible families.
  
  
• More than 4 million people—roughly half of them children—escape poverty each year due to the EITC. A study by Columbia University's National Center for Children in Poverty found the EITC reduces poverty among young children by nearly one fourth.²
  
  
• The EITC significantly increases the number of single parents who join the workforce. One study found the proportion of single mothers who worked increased dramatically between 1984 and 1996 due to increases in the amount of the EITC.³
  
  
• Interviews suggest that EITC workers use their refunds to pay off debt, invest in education, and secure decent housing, thus enhancing economic security and promoting economic opportunities in their neighborhoods.⁴
  

For more information on state Earned Income Tax Credits, please see “A HAND UP: How State Earned Income Tax Credits Help Working Families Escape Poverty in 2006,” by Ami Nagle and Nicholas Johnson at the Center on Budget and Policy Priorities.

¹Elizabeth Kneebone, “Bridging the Gap: Refundable Tax Credits in Metropolitan and Rural America,” The Brookings Institution, April 2008, p.4. http://www.brookings.edu/reports/2008/0414_eitc_kneebone.aspx.

²Neil G. Bennett, Jiali Li, Younghwan Song, and Keming Yang, “Young Children in Poverty: A Statistical Update,” National Center for Children in Poverty, June 17, 1999, p. 11. http://cpmcnet.columbia.edu/dept/nccp/99uptext.html

³Nada Eissa and Jeffrey B. Liebman, “Labor Supply Response to the Earned Income Tax Credit,” National Bureau of Economic Research, Working paper 5158, June 1995, p.3.

⁴Nicolas Johnson, “A Hand Up: How State Earned Income Tax Credits Help Working Families Escape Poverty in 2006,” The Center on Budget and Policy Priorities, March 2006, p.2. http://www.cbpp.org/3-8-06sfp.htm