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?
- What is the Making Work Pay Credit?
- What is the American Opportunity 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 have provided valuable tax benefits for working families for years. These and other public benefits constitute a safety net that alleviates hardship and effectively reduces poverty, but the safety net has been substantially weakened over the last eight years and is stretched thin by the current recession.
The Child Tax Credit and the Earned Income Tax Credit were expanded by the American Recovery and Reinvestment Act of 2009 (ARRA), which also added the Making Work Pay Credit and the American Opportunity Tax Credit. But the ARRA improvements are in effect only for two years; many of the poorest families and workers still receive little or no benefit from these tax credits; and millions of families fail to claim federal and state tax credits for which they are eligible.
The Child Tax Credit is worth up to $1,000 per child under age 17, with no limit on the number of children.
Ironically, however, millions of children receive little or no benefit from this credit because their families are too poor to qualify. The credit is partially refundable – if a family does not owe enough taxes to use all of its Child Tax Credit, it may be eligible for a refund. But because the refund is calculated as a percentage (15%) of income over a threshold amount, families earning less than the threshold are ineligible for the refundable component of the credit; millions of other low-income families receive only a small credit. Moreover, the threshold is indexed for inflation, so that each year an increasing number of families whose wages don’t keep up with inflation are excluded from the tax benefit.
The ARRA lowered the eligibility threshold for the refundable Child Tax Credit from $8,500 in 2008 to $3,000 for 2009 and 2010. The reduction in the earnings threshold means that a family with two children earning $10,000 a year, eligible for a credit of $225 in 2008, is eligible for a credit of $1,050 in 2009 and 2010. Compared with 2008, families of 2.9 million children will be newly eligible for the credit, and families of 10 million children will receive a higher credit than they otherwise would have.
But this change is effective for 2009 and 2010 only. Every year, the minimum required earnings are adjusted upward, which disqualifies an increasing number of parents whose wages don't keep up with inflation. Without the ARRA, families earning less than $12,550 in 2009 and about $12,600 in 2010 would have been ineligible for the Child Tax Credit. Advocates must continue to work to permanently lower the earnings requirement, keep it from increasing because of inflation, and eventually make the credit fully refundable.
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. It is fully refundable. 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 for families with children is available in 2009 to married couples earning less than $40,463 and to single people earning less than $35,463. The maximum benefit is $5,657 for families with three or more children. The ARRA provides a higher credit in 2009 and 2010 for families with three or more children; before 2009, families with more than two children received no extra credit under the basic formula.
The “marriage penalty” in the EITC has also been reduced for 2009 and 2010. The “marriage penalty” exists because when two low-income people marry, their higher combined income could lower their EITC. For 2009 and 2010, the ARRA increased the income range over which the EITC phases out for married couples with children to $5,000 more than the threshold for single people.
The EITC also provides a small benefit — up to $457 in 2009 — for very low-income working adults aged 25 to 64 without eligible children. In 2009, single adults with incomes below $13,440, or married couples with incomes below $18,440 are eligible. The Earned Income Tax Credit rate for workers without children has not been increased since its inception in 1993. The ARRA did not change the EITC for childless adults.
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 families 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.
What is the Making Work Pay Credit?
The Making Work Pay Credit is a fully- refundable credit that is worth up to $400 for an individual and $800 for a couple in both 2009 and 2010. Most workers began receiving the credit in Spring 2009 as an adjustment in the amount of income tax withheld from their paychecks; if additional credit is owed, it can be The credit can be taken through a reduction in the amount of income tax that is withheld from a worker’s paychecks or can be claimed as a credit on the next tax return. It starts to phase out for tax filers with incomes above $75,000 ($150,000 for married couples).
What is the American Opportunity Tax Credit?
The ARRA replaced the non-refundable Hope Scholarship credit with a new American Opportunity Tax Credit to help pay expenses for higher education. The new credit is worth up to $2,500 a year and is partially (40 percent) refundable. It starts to phase out for those earning more than $80,000 ($160,000 for married couples).
Ways to Improve Tax Credits for Working Families
There are several ways Congress could improve these credits.
Completely eliminating the earnings requirement for the refundable Child Tax Credit would lift millions of Americans out of poverty and would increase the incomes of millions more. If Congress keeps the threshold at $3,000 in future years and stops increasing it with inflation, the number of families helped still would be significant.
Increasing 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.
Making permanent the expansions of the EITC for families with children in the ARRA – the additional credit for families with three or more children and additional marriage penalty relief – would provide additional assistance to low-income families with children.
According to a 2007 report from the Tax Policy Center, 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
As part of the American Recovery and Reinvestment Act of 2009 (ARRA), Congress has increased tax benefits for working families for 2009 and 2010 by lowering the Child Tax Credit’s family earnings threshold; increasing the amount of EITC for families with three or more children; reducing the EITC marriage penalty; creating the Making Work Pay Credit; and establishing the American Opportunity Tax Credit.
President Obama’s FY 2010 budget would make permanent the ARRA improvements to the Child Tax Credit and the EITC, and make permanent the Making Work Pay Credit and the American Opportunity Credit.
However, the President’s FY 2010 budget does not include two important tax improvements for low-income working families that he supported during his campaign: making the Child and Dependent Care Tax Credit fully refundable and increasing the percentage of expenses that low- and moderate-income households can claim; and increasing the EITC for adults without qualifying children. These improvements are included in bills introduced in this Congress.
The Family Tax Relief Act of 2009 (S. 997), sponsored by Senators Blanche Lincoln (D-AR) and Olympia Snowe (R-ME) would improve the Child and Dependent Care Tax Credit for millions of families. The bill would increase and make refundable the tax credit for employment-related dependent care expenses. It would also amend the rules relating to employer-provided dependent care benefits, increasing and indexing the exclusion and modifying the test for ensuring that non-highly compensated employees receive a fair share of benefits.
The American Clean Energy and Security Act of 2009 (H.R. 2454), the “climate change” bill that passed the House on June 26, 2009, includes an increase in the EITC for low-income workers without qualifying children. It would double the maximum amount of the credit and allow workers to receive the credit at higher income levels.
Information & resources:
Safety Net Effective at Fighting Poverty But Has Weakened for the Very Poorest, Arloc Sherman, Center on Budget and Policy Priorities (July 6, 2009).
Family Tax Credits in the American Recovery and Reinvestment Act of 2009, National Women's Law Center (March 2009).
Recovery Agreement Temporarily Expands Child Tax Credit for Large Numbers of Children in Every State, Center on Budget and Policy Priorities (Feb. 12, 2009).
President Obama’s Budget for Fiscal Year 2010 and Tax Reform, National Women's Law Center (May 2009).
The Family Tax Relief Act of 2009, National Women's Law Center (August 2009).
EITC Eligibility Rules Outlined, IRS (January 2009).
EITC Thresholds and Tax Law Updates, IRS (April 2009).
Reforming the Child and Dependent Care Tax Credit, Tax Policy Center (June 2007).
Extending the EITC to Noncustodial Parents: Potential Impacts and Design Considerations, Laura Wheaton and Elaine Sorenson, Tax Policy Center (June 12, 2009).