CRS Updates Report on EITC Changes

Qualifications for, and the amount of, the EITC depend on the amount of earned income, adjusted gross income (AGI), and whether the tax filer has a qualified child. For the EITC, a qualified child is determined by the definition of a qualified child for the personal exemption. In general, for the personal exemption for a dependent, an individual is either a qualifying relative or a qualifying child. A qualified child for the EITC must meet the following three criteria of a qualified child for the personal exemption:

• relationship -- the child must be a son, daughter, stepson, stepdaughter, or descendent of such a relative; a brother, sister, stepbrother, stepsister, or descendent of such a relative; an adopted child; or a foster child placed with the taxpayer;

• residence -- the child must live with the tax filer for more than half the year; and

• age -- the child must be under age 19 (or age 24, if a full-time student) or be permanently and totally disabled.

In general, the EITC amount increases with earnings up to a point (the maximum earned income amount), then remains unchanged (at the maximum credit) for a certain bracket of income, and then, beginning at the phase-out income level, gradually decreases to zero as earnings continue to increase. A family will be disqualified from receiving the earned income credit if investment income exceeds a specified level.

The maximum earned income amount, the phase-out income level, and the disqualifying investment income amount are indexed for inflation. For married couples filing a joint tax return, in tax years 2002 through 2004 the phase-out level was $1,000 higher than for other filers, and in tax years 2005 through 2007 the phase-out level is $2,000 higher.

To make it easier for tax filers to determine the correct amount of the credit, a table for the earned income credit is included in the income tax booklet based on $50 increments of income. Table 1 shows the parameters for the EITC (credit rates, phase-out rates, maximum earned income amount, maximum credit, phase-out income level, and disqualifying investment income level) for tax years 2005, 2006, and 2007.

                Table 1. EITC Parameters for Tax Years 2005-2007

As shown in Table 1, between tax years 2006 and 2007, there are small increases in the maximum earned income, maximum credit, and phase-out income levels associated with indexing for inflation. The effect of the indexing is that the largest percentage increases in EITC between 2006 and 2007 will be for higher income EITC eligible tax filers. A limited number of taxpayers not eligible for the EITC in tax year 2006 will, because of indexing, be eligible for a small EITC in tax year 2007.

The marriage penalty relief for the EITC provided by P.L. 107-16, does not change for tax years 2006 and 2007. The phase-out income level for married taxpayers filing a joint tax return is $2,000 higher than the phase-out income level for other taxpayers.

Legislative Changes Affecting the EITC in 2006 and 2007

The Working Families Tax Relief Act of 2004 (P.L. 108-311) provided that for tax years 2004 and 2005, taxpayers in the military have the option of including combat pay (which is generally nontaxable) in computing earned income for the EITC. The Gulf Opportunity Zone Act of 2005 (P.L. 109-135) extended the option of including combat pay for computing the EITC through tax year 2006.