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CRS Updates Report on EITC Changes

JAN. 4, 2011

RS21352

DATED JAN. 4, 2011
DOCUMENT ATTRIBUTES
Citations: RS21352

 

Christine Scott

 

Specialist in Social Policy

 

 

January 4, 2011

 

 

Congressional Research Service

 

7-5700

 

www.crs.gov

 

RS21352

 

 

Summary

The earned income tax credit (EITC), established in the tax code in 1975, provides cash assistance to lower income working parents and individuals through the tax system. The EITC for will be higher in 2010 and 2011 than it was in 2009. An increase in the size of the EITC will occur because the maximum amount of earned income used to calculate the credit and the phaseout income level are indexed for inflation. The increases reflect the inflation adjustment.

For tax year 2010, the maximum EITC for tax filers without children was $457, and it will increase to $464 in 2011. For families with one child, the maximum credit was $3,050 in tax year 2010, and it will increase to $3,094 in 2011. For families with two children, in tax year 2010 the maximum was $5,036, and it will increase to $5,112 in 2011. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) created a new credit category, for families with three or more children for tax years 2009 and 2010. For families with three or more children, in tax year 2010, the maximum credit was $5,666.

Beginning in tax year 2008, the phase-out level for married couples filing a joint tax return is $3,000 higher than the level for other filers. ARRA increased the $3,000 differential for married couples to $5,000 for tax year 2009. In tax year 2010, this amount was adjusted for inflation, and was $5,010.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended the ARRA provisions for marriage penalty relief and the category for three or more children through tax year 2012. The phase-out level for married couples filing a joint tax return is $5,080 higher than for other tax filers. For families with three or more children, the maximum credit in 2011 is $5,751.

This report will be updated when new information becomes available.

                            Contents

 

 

 Calculation of the EITC

 

 

 EITC Changes

 

 

 Legislative Changes Affecting the EITC in 2009, 2010 and 2011

 

 

 Tables

 

 

 Table 1. EITC Parameters for Tax Years 2009-2011

 

 

 Contacts

 

 

 Author Contact Information

 

 

Calculation of the EITC

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

 

For the EITC, a qualified child cannot be married and must have a principal place of abode (where the child lives with the tax filer) within the United States (an exception exists for military personnel stationed overseas). A custodial parent may have a qualified child for the EITC without using other tax benefits associated with the child (such as the personal exemption) because the EITC disregards a waiver of the personal exemption and the child tax credit to a noncustodial parent.

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. In tax years 2005 through 2007, the phase-out level was $2,000 higher, and beginning in tax year 2008, the phase-out level is $3,000 higher. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) increased this differential to $5,000 for tax year 2009, and adjusted for inflation was $5,010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended the ARRA provisions for marriage penalty relief through tax year 2012. The phase-out level for married couples filing a joint tax return is $5,080 higher than for other tax filers.

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 2009, 2010, and 2011.

                Table 1. EITC Parameters for Tax Years 2009-2011

 

 _____________________________________________________________________________

 

 

                                                       Credit rate    Phase-out

 

                          2009 ($)   2010 ($) 2011 ($)    (%)         rate (%)

 

 

 _____________________________________________________________________________

 

 

 No children                                                 7.65%      7.65%

 

 

 Maximum earned income

 

 amount                     5,970     5,980     6,070

 

 

 Maximum credit               457       457       464

 

 

 Phase-out income level     7,470     7,480     7,590

 

 

 Phase-out income level

 

 for married filing joint  12,470    12,490    12,670

 

 

 Income where EITC = 0     13,440    13,460    13,660

 

 

 Income where EITC = 0

 

 for married filing joint  18,440    18,470    18,740

 

 

 One child                                                  34.00%     15.98%

 

 

 Maximum earned income

 

 amount                     8,950     8,970     9,100

 

 

 Maximum credit             3,043     3,050     3,094

 

 

 Phase-out income level    16,420    16,450    16,690

 

 

 Phase-out income level

 

 for married filing joint  21,420    21,460    21,770

 

 

 Income where EITC = 0     35,463    35,535    36,052

 

 

 Income where EITC = 0 for

 

 married filing joint      40,463    40,545    41,132

 

 

 Two children                                              40.00%     21.06%

 

 

 Maximum earned income

 

 amount                    12,570    12,590    12,780

 

 

 Maximum credit             5,028     5,036     5,112

 

 

 Phase-out income level    16,420    16,450    16,690

 

 

 Phase-out income level

 

 for married filing joint  21,420    21,460    21,770

 

 

 Income where EITC = 0     40,295    40,363    40,964

 

 

 Income where EITC = 0

 

 for married filing joint  45,295    45,373    46,044

 

 

 Three or more children

 

 (tax years 2009 though

 

 2012)                                                    45.00%      21.06%

 

 

 Maximum earned income

 

 amount                    12,570    12,590    12,780

 

 

 Maximum credit             5,657     5,666     5,751

 

 

 Phase-out income level    16,420    16,450    16,690

 

 

 Phase-out income level

 

 for married filing joint  21,420    21,460    21,770

 

 

 Income where EITC = 0     43,279    43,352    43,998

 

 

 Income where EITC = 0

 

 for married filing joint  48,279    48,362    49,078

 

 

 Disqualifying investment

 

 income level               3,100     3,100     3,150

 

 _____________________________________________________________________________

 

 

 Source: Table prepared by the Congressional Research Service

 

 (CRS).

 

 

 Notes: To reflect the statutory language for calculating the

 

 inflation adjusted EITC parameters, the maximum earned income amount

 

 and the phase-out income level are rounded to the nearest $10,

 

 whereas the disqualifying interest income level is rounded to the

 

 nearest $50. In preparing their tax returns, tax filers will use a

 

 table with $50 increments of income to look up their EITC amount.

 

 

EITC Changes

As shown in Table 1, between tax years 2009 and 2011, there are 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 2009 and 2011 will be for higher-income EITC-eligible tax filers. A limited number of taxpayers not eligible for the EITC in tax year 2009 will, because of indexing, be eligible for a small EITC in tax years 2010 and 2011.

Legislative Changes Affecting the EITC in 2009, 2010 and 2011

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) created a new credit category, for families with three or more children, for tax years 2009 and 2010 only. For families with three or more children, the credit rate in tax years 2009 and 2010 is 45%. The ARRA also increased the phase-in amount for married couples filing joint tax returns so that it is $5,000 higher than for unmarried taxpayers in tax year 2009. In tax year 2010, the differential is adjusted for inflation, and is $5,010.

P.L. 111-226 eliminated the option to receive the credit during the tax year (the Advance Earned Income Credit), for tax years beginning after December 31, 2010.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended the ARRA provisions for marriage penalty relief and the category for three or more children through tax year 2012.

P.L. 111-312 also extended through tax year 2012, the changes to the credit made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) that were scheduled to expire after December 31, 2010. The EGTRRA changes that were extended through tax year 2012 include (1) changing the definition of earned income for the EITC so that it does not include nontaxable employee compensation; (2) eliminating the reduction in the EITC for the alternative minimum tax; (3) simplifying the calculation of the credit through use of AGI rather than modified adjusted gross income; and (4) providing marriage penalty relief through a higher phase-out income level for taxpayers filing married joint tax returns.

Author Contact Information

 

 

Christine Scott

 

Specialist in Social Policy

 

cscott@crs.loc.gov, 7-7366
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