Working Family Tax Credits
- What is the Child Tax Credit?
- What is the Earned Income Tax Credit?
- What is the Child and Dependent Care Tax Credit?
- Ways to improve tax credits for working familes
- Where things stand on the Hill
- Information & resources
The Child Tax Credit, Earned Income Tax Credit, and Child and Dependent Care Credit provide valuable tax benefits for working families. Some improvements to these credits were included in the tax cuts enacted since 2001, but many of the poorest families and workers still get little or no benefit from these credits. Further improvements could significantly reduce poverty and help other hard-pressed families.
The Child Tax Credit is worth up to $1,000 per child under age 17. But, ironically, millions of children receive no benefit from this credit because their families are too poor to qualify. Although the credit is available as a refund to some families with little or no federal income tax liability, in 2008, a family must earn at least $12,050 to qualify for the refundable credit. As a result, 6.5 million children in low-income working families are denied any help from the Child Tax Credit. Another 10.3 million get only a partial credit, because a family with one child must earn $18,717 in 2008 to benefit from the full $1,000 credit (a family with two or more children needs higher earnings to get the full benefit). Every year, the minimum required earnings are adjusted upward, which excludes an increasing number of parents whose wages don't keep up with inflation.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) boosts the wages of eligible tax filers with modest incomes and lifts millions of children out of poverty. Tax filers can use the credit to offset their federal tax liability or receive it as a refund, if they owe little or no federal income tax. The EITC is available in 2008 to married couples earning less than $41,646 or singles earning less than $38,646, and provides a maximum benefit of just over $4,824 for families with two or more children. The EITC lifts more children out of poverty than any other federal program. However, because the credit is not increased for families with more than two children, it provides relatively less help in helping large families escape poverty.
The EITC also provides a small benefit — up to $438 in 2008 — for very low-income working adults aged 25 to 64 without eligible children. In 2008, single adults with incomes below $12,880, or married couples with incomes below $15,880, are eligible. The Earned Income Tax Credit rate for workers without children has not been increased since its inception in 1993.
What is the Child and Dependent Care Tax Credit?
The Child and Dependent Care Tax Credit is designed to offset some of the expenses that parents pay for child care or dependent care in order to work. Families can claim a percentage of their care expenses, up to $3,000 for one child or dependent and $6,000 for two or more children or dependents. The percentage drops as family income increases, from 35 percent for families with incomes up to $15,000, to 20 percent for families with incomes above $43,000. The maximum value of the credit is $2,100. However, this credit can only be used to offset federal income tax liability; it is not available as a refund. As a result, many low-income families who have little or no federal income tax liability but struggle to pay for child care receive no benefit. In addition, the credit covers only a fraction of expenses, even for low-income families, and is not adjusted for inflation.
Ways to Improve Tax Credits for Working Families
There are several ways Congress could improve the Child Tax Credit, Earned Income Tax Credit, and Child and Dependent Care Credit.
Eliminating the earnings requirement for the refundable Child Tax Credit would lift over three million Americans out of poverty, two-thirds of them children, and would increase the incomes of millions more. If Congress lowers the minimum earnings requirement without eliminating it, and keeps the threshold from rising with inflation, the number of poor children helped would be less, but could still range in the millions.
Significantly increasing the amount of the EITC for low-income adults without eligible children and expanding the numbers of workers who qualify for it would help millions of low-wage workers escape poverty, offset the significant payroll taxes they pay, and provide additional work incentives. The EITC for families with children could be improved by increasing assistance for families with three or more children and further reducing marriage penalties.
Making the Child and Dependent Care Credit fully refundable, so that families with employment-related care expenses could claim the credit without regard to their federal income tax liability, would provide child care assistance to an additional 1.6 million families, the large majority with incomes below $30,000. Increasing the percentage of expenses that low- and moderate-income families are allowed to claim and indexing the thresholds and expense limits would further expand the credit.
Where things stand on the Hill
An expansion of the refundable Child Tax Credit was included in a bill passed by the House on May 21, 2008 (H.R. 6049) and introduced in the Senate (S. 3335) by Senate Finance Chairman Max Baucus (D-MT) on July 24, 2008. The bills would increase tax benefits for 13 million children in low-income working families by lowering the Child Tax Credit’s family earnings threshold to $8,500 in 2008, from the current-law threshold of $12,050. Over 1,100 organizations from every state have urged Congress to support this step toward reducing child poverty. But, as of August 2008, the Senate remains deadlocked over whether or not to offset the costs of the bill with increases in federal revenues.
Several bills to improve various tax credits for low-income families have been introduced in this Congress, but are less likely to move this year. Two, introduced by members of the tax-writing committees, are highlighted below.
An increase in the EITC for workers without qualifying children was included in the broad tax relief bill, HR 3970, introduced by House Ways and Means Chairman Charles Rangel in October 2007.
A bill to improve the federal Child and Dependent Care Credit for millions of families (S. 3079) was introduced on June 4, 2008 by Senators Gordon Smith (R-OR) and Blanche Lincoln (D-AR), members of the Senate Finance Committee. The bill would increase and make refundable the tax credit for employment-related dependent care expenses. The bill also makes permanent the expanded tax credit for adoption expenses.
Information & resources:
13 Million Children Would Benefit From Child Credit Expansion in Tax “Extenders” Bill, Center on Budget and Policy Priorities (July 29, 2008).
“Tax Extenders” Bill the Latest Test of Congress’s Commitment to Fiscal Discipline, Center on Budget and Policy Priorities (June 10, 2008).
The Expanded Child and Dependent Care Tax Credit in the Family Tax Relief Act of 2008 Would Help Make Child Care More Affordable for Millions of Families, National Women’s Law Center (June 2008).
Improving the Refundable Child Tax Credit: An Important Step Toward Reducing Child Poverty, Center on Budget and Policy Priorities (May 19, 2008).
Tax Topics: Working Families, Tax Policy Center.
Eligibility for Child Tax Credit by Age of Child, Tax Policy Center (May 22, 2007).
Reforming the Child and Dependent Care Tax Credit, Tax Policy Center (June 11, 2007)
Tax Reform and Poverty, Center on Budget and Policy Priorities (April 10, 2006).