CRS Says Earned Income Credit Will See Little or No Increase in 2010

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 some earned income credit recipients will be slightly higher in 2010 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 phase-out income level are indexed for inflation. The increases between 2009 and 2010 are small reflecting the inflation adjustment.

For tax year 2009, the maximum EITC for tax filers without children is $457, and it will not increase for 2010. For families with one child, the maximum credit is $3,043 in tax year 2009, and it will increase to $3,050 in 2010. For families with two children, in tax year 2009 the maximum is $5,028, and it will increase to $5,036 in 2010. 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, in tax year 2009, the maximum credit is $5,657, which will increase to $5,666 for tax year 2010.

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 ($5,000) is adjusted for inflation.

This report will be updated when new information becomes available.

Contents

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 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. 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 adjusts the $5,000 for inflation for tax year 2010.

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 2008, 2009, and 2010.

        Table 1. EITC Parameters for Tax Years 2008-2010

As shown in Table 1, between tax years 2009 and 2010, 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 2009 and 2010 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 year 2010.

Legislative Changes Affecting the EITC in 2009 and 2010

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 $5,000 differential will be adjusted for inflation.

Expiring Provisions

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) made several changes to the EITC that will expire (not be in effect) after December 31,2010. Changes to the EITC that will expire include

• changing the definition of earned income for the EITC so that it does not include nontaxable employee compensation;

• eliminating the reduction in the EITC for the alternative minimum tax;

• simplifying the calculation of the credit through use of AGI rather than modified adjusted gross income; and

• providing marriage penalty relief through a higher phase-out income level for taxpayers filing married joint tax returns.