The Earned Income Tax Credit (EITC): Legislation in the 113th Congress
Released: 2014-10-31T00:00:00

Introduction

The Earned Income Tax Credit (EITC) is a refundable tax credit available to eligible low-wage workers. Many low-income workers, especially those with children, can receive several thousand dollars of financial assistance from this tax provision. (Childless recipients can receive slightly less than $500 if they qualify for the maximum credit.) Because the credit is refundable, an EITC recipient need not owe taxes to receive the benefit.

In the 113 th Congress, many legislative proposals have been introduced that would modify the EITC. In general, these bills modify either how the credit is calculated or eligibility requirements for the credit, or both. To understand how these bills would modify the credit, this report first provides a brief overview of eligibility requirements for the credit and how the credit is calculated under current law. (For a more detailed description of EITC eligibility requirements and the calculation of the credit, see CRS Report RL31768, The Earned Income Tax Credit (EITC): An Overview , by [author name scrubbed].) The report then summarizes how different legislative proposals modify certain parameters of the credit, starting with modifications that expand the credit for workers without qualifying children , followed by those that expand the EITC for workers with qualifying children . (Some legislative proposals modify the credit for workers both with and without children.) O ther modifications to the credit, including those made by House Ways and Means Committee Chairman Camp 's tax reform proposal, are briefly summarized.

Overview of the EITC

Eligibility for and the amount of the EITC are based on a variety of factors, including residence and taxpayer ID requirements, the presence of qualifying children, age requirements for certain recipients, amount of investment income, and the recipient's earned income. This section briefly describes key eligibility factors and provides an overview of how eligible taxpayers calculate the value of the credit under current law.

Eligibility for the EITC

There are a variety of eligibility criteria for the EITC, described below.

Residence and ID Requirements: Under current law, an EITC recipient must be a resident of the United States, unless the recipient resides in another country because of U.S. military service. In addition, to be eligible for the credit, the tax filer must provide valid Social Security numbers (SSNs) for work purposes for themselves, spouses if married filing jointly, and any qualifying children.

Definition of Qualifying Child: To be considered a "qualifying child" of an EITC recipient, three requirements must be met. First, the child must have a specific relationship to the tax filer (son, daughter, step child or foster child, brother, sister, half-brother, half-sister, step brother, step sister, or descendent of such a relative). Second, the child must share a residence with the taxpayer for more than half the year in the United States. Third, the child must meet certain age requirements ; namely, the child must be under the age of 19 (or age 24, if a full-time student) or be permanently and totally disabled.

Age Requirements for EITC Recipients with No Qualifying Children: If a tax filer has no qualifying children , he or she must be between 25 and 64 years of age. Childless taxpayers under age 25 or older than 64 are not eligible for the EITC. There is no age requirement for tax filers with qualifying children.

Investment Income: Tax filers with investment income greater than $3,350 in 2014 are ineligible for the EITC. Investment income includes interest income (including tax-exempt interest), dividends, net rent, and royalties that are from sources other than the filer's ordinary business activity, net capital gains, and passive income.

Calculating the Credit

The EITC is calculated based on a recipient's earnings. Specifically, the EITC equals a fixed percentage (the "credit rate") of earned income until the credit amount reaches its maximum level. The EITC then remains at its maximum level over a subsequent range of earned income, between the "earned income amount" and the "phase-out amount." Finally, the credit gradually decreases in value to zero at a fixed rate (the "phase-out rate") for each additional dollar of earnings above the phase-out amount. The specific values of these EITC parameters (i.e., credit rate, earned income amount, etc.) vary depending on the several factors, including the number of qualifying children and the marital status of the tax filer, as illustrated in Table 1 .

Figure 1 provides a graphic representation of the amount of the EITC for an unmarried EITC recipient with one child in 2014. As illustrated in Figure 1 (and in the "one qualifying child" column in Table 1 for unmarried tax filers), the credit phases in at a rate of 34% of earnings for tax filers with earnings under $9,720 in 2014. At $9,720 of earnings, the EITC reaches its maximum level of $3,305 and remains at that level until earnings exceed $17,830. For taxpayers with earnings above this threshold, the $3,305 amount is gradually reduced by 15.98 cents for every dollar above $17,830. Unmarried tax filers with one child and earnings at or above $38,511 are ineligible for the EITC.

Legislation That Expands the Credit for Childless Workers

Several bills introduced in the 113 th Congress would expand the EITC for childless workers. These bills— H.R. 4117 , H.R. 2116 , S. 836 , S. 2162 , H.R. 2359 , and the Obama Administration's FY2015 budget—would modify how the credit is calculated, increasing the amount of the credit for childless workers. All of these bills—except H.R. 2359 —would also modify various eligibility rules for the credit, expanding the number of taxpayers eligible to claim it. These legislative changes are summarized below in Table 2 and described subsequently in this report.

Increasing the Amount of the Credit

A variety of legislative changes made to the formula used to calculate the EITC for childless workers would increase the amount of the credit. Generally, these bills would increase a variety of different parameters, including the credit rate, the earned income amount, and the phase-out income level. As illustrated in Figure 2 and Figure 3 , these changes would generally increase the maximum value of the credit for childless workers from $496 to approximately $1,000 (Administration budget proposal); $1,300 ( H.R. 2359 ); $1,350 ( H.R. 2116 , S. 836 , S. 2162 ); or $1,500 ( H.R. 4117 ).

Increasing the Credit Rate

Under current law, the credit rate for childless EITC recipients is 7.65%. All else being equal, increasing the credit rate would increase the amount of the credit.

Under H.R. 4117 , the credit rate for childless workers would increase to 23.15% (the phase-out rate would also increase from 7.65% to 23.15%). Under H.R. 2359 , the credit rate for childless workers would increase to 20% (the phase-out rate would remain at its current level of 7.65%). Under H.R. 2116 , S. 836 , S. 2162 , and the FY2015 Administration budget proposal , the credit rate for childless workers would double to 15.3% (the phase-out rate would also increase from 7.65% to 15.3%).

Increasing the Earned Income Amount

As previously discussed, the "earned income amount" is the earnings level at which the credit reaches it maximum value. All else being unchanged, increasing the earned income amount increases the amount of the credit for most EITC claimants. For example, under current law, the earned income amount for a childless EITC claimant is $6,480. If the earned income amount was increased to $10,000 (and all other parameters of the credit remained unchanged from current law), all tax filers with income above the current earned income threshold of $6,480 would receive a larger credit. The maximum value of the credit would increase from $496 to $765.

Under H.R. 2116 , the earnings level at which the childless EITC reaches its maximum value would increase from its current level of $6,480 to $8,820 (adjusted annually for inflation).

Increasing the Phase-Out Amount and Marriage Penalty Relief

The EITC phases out for recipients when income exceeds a "phase-out amount." Increasing the phase-out amount increases the credit amount for tax filers whose income places them in the downward sloping "phase-out range" of the credit (see Figure 1 for an illustration of the "phase-out range"). Under current law, the phase-out amount for unmarried tax filers is specified by law and the phase-out amount for married tax filers is calculated by adding the applicable amount of marriage penalty relief. (For example, as illustrated in Table 1 , the phase-out amount for married taxpayers with a given number of children is calculated by adding $5,430—the current level of "marriage penalty relief"—to the phase-out amount for unmarried recipients with the same number of children.) Beginning in 2018, this marriage penalty relief is scheduled to revert permanently to $3,000 (adjusted for inflation).

H.R. 4117 would increase both the phase-out amount and marriage penalty relief. Specifically, the bill would increase the phase-out amount from its current level of $8,110 for unmarried tax filers to $16,630 (and subsequently adjust this amount for inflation in future years). For childless workers only, this bill would also increase marriage penalty relief permanently to $8,000 (adjusted for inflation). H.R. 2116 would increase the phase-out amount for unmarried recipients to $10,425 (and adjust this amount annually for inflation). The 2009 temporary increase in the marriage penalty relief of $5,000 (adjusted for inflation, $5,430 in 2014) would also be made permanent. The President's FY2015 budget would increase the phase-out amount for unmarried tax filers to $11,500 in 2015. These levels would be annually adjusted for inflation in the future. Like H.R. 2116 , the 2009 temporary increase in the marriage penalty relief would be made permanent.

Changing Eligibility Rules

A variety of legislative changes made to the eligibility rules of the EITC for childless workers would expand eligibility for the credit to more childless workers.

Changing the Eligibility Age for the Childless EITC

Currently, childless workers must be between the ages of 25 and 64 to be eligible for the childless EITC.

H.R. 4117 and S. 836 would lower the minimum age requirement for the childless EITC from 25 to 21, leaving the maximum age limitation unchanged. H.R. 2116 and S. 2162 would also lower the minimum age requirement for the childless EITC from 25 to 21. However, eligible workers between the ages of 21 and 24 could not be full-time students. The maximum age limitation would remain unchanged. The Obama Administration's FY2015 budget proposal would expand eligibility for both younger and older childless workers. Specifically, the proposal would "allow tax filers at least aged 21 and under 67 years old to claim the EITC for workers without qualifying children." , Full-time students between the ages of 21 and 24 would remain ineligible for the EITC.

Allowing Tax Filers Whose Children Do Not Have Social Security Numbers (SSNs) to Receive the Childless EITC

Under current law, tax filers with qualifying children must provide those children's SSNs (as well as their own). If tax filers do not provide the SSNs of all of their otherwise qualifying children when they claim the EITC, the tax filers will be ineligible for the EITC—even the EITC for childless workers. (By contrast, if tax filers provide the SSNs of some but not all of their qualifying children, the IRS will recalculate the filers' EITC credit value based on the number of qualifying children with SSNs.)

H.R. 2116 would allow tax filers to receive the childless EITC if the tax filer does not provide the SSNs of all of their otherwise qualifying children.

Simplifying the Rules Regarding the Presence of a Qualifying Child to Allow Certain Tax Filers to Claim the Childless EITC

Under current law, for the purposes of the EITC, qualifying children must meet three requirements: (1) they must be relatives of the tax filer, (2) they must live with the tax filer for more than half the year in the United States, and (3) they must be under 19 years old (or 24, if a full-time student). As a result of this definition, a child may be the qualifying child of more than one tax filer in the household. For example, a child who lives with a single parent, grandparent, and aunt in the same house could be a qualifying child of all three of these individuals. But only one of these individuals can claim the qualifying child for the EITC, and the others are barred from claiming the childless EITC.

Specifically, the IRS states, "If you have a qualifying child and do not claim the EITC using that qualifying child, you cannot take EITC for those who do not have a qualifying child." In other words, you cannot claim the EITC for childless workers if you in fact do have a qualifying child, but do not claim them for the EITC. For example, in the situation where a grandparent or aunt claims their qualifying grandchild or niece/nephew for the EITC, the child's parent—even if the parent lives with the child and that child is also their qualifying child—could not claim the EITC for childless workers.

H.R. 2116 would allow certain tax filers who did not claim their qualifying child for the EITC (and whose qualifying child was claimed by another tax filer for the EITC) to claim the EITC for childless workers. This rule would not apply if the qualifying child lived with both parents. Hence, if a child lived with their grandmother, aunt, and mother at the same address for the year, and the grandmother claimed the child for purposes of the EITC, both the aunt and mother could claim the childless EITC under this bill. In contrast, according to this legislation, if the child lived with both unmarried parents at the same address for the year, and one parent claimed the child for the EITC, the other parent could not claim the childless EITC. The Obama Administration's FY2015 budget , like H.R. 2116 , proposes simplifying the rules regarding the presence of a qualifying child. According to the Treasury's description of the proposal, this change "would allow otherwise eligible tax filers residing with qualifying children whom they do not claim to receive the EITC for workers without qualifying children."

Legislation That Expands the Credit for Workers with Qualifying Children

There are several bills introduced in the 113 th Congress that would expand the EITC for workers with qualifying children. Several of these bills— H.R. 2116 , S. 836 , H.R. 2320 , and the Obama Administration's FY2015 budget—would make the larger credit for families with three or more children, enacted temporarily as part of the American Recovery and Reinvestment Act (ARRA; P.L. 111-5 ), permanent. H.R. 2320 would also expand the EITC for tax filers with four, five, six, and seven or more qualifying children. H.R. 2116 also includes a provision to enable certain separated spouses with children to claim the credit. Finally, S. 2162 includes a proposal that would allow dual-earner couples with at least one child to reduce their earned income if it would result in a larger credit.

Increasing the Amount of the Credit

The value of the EITC depends on the credit rate. Under current law, the credit rate increases based on the number of qualifying children an EITC recipient has, up to three qualifying children. The current credit rates for EITC recipients with one, two, and three or more qualifying children are 34%, 40%, and 45%, respectively. Before 2009, there were two credit rates for EITC recipients with qualifying children: one for those with one qualifying child (34%) and one for those with two or more qualifying children (40%). The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ) created a new increased credit rate of 45% (and hence larger credit) for families with three or more children. This modification was extended several times on a temporary basis. Most recently it was extended through the end of 2017 by the American Taxpayer Relief Act (ATRA; P.L. 112-240 ). All else being equal, increasing the credit rate results in a larger credit.

H.R. 2116 , S. 836 , and the FY2015 Administration budget proposal would make the 45% credit rate for families with three or more children permanent. H.R. 2320 would expand the EITC for tax filers with four, five, six, and seven or more qualifying children by increasing the credit rate, as illustrated in Table 3 .

Changing the Separated Spouse Rule

Under current law, married tax filers generally have only two options when they file their tax returns: they can file a joint return (married filing jointly) or they can file a separate return (married filing separately). Even in cases where legally married spouses live apart (like separation), the spouses generally cannot file their income taxes using another status like single or head of household.

Currently, only those married tax filers who file jointly may claim the EITC. However, a separated spouse with a qualifying child (or children) may be able to claim the EITC as an unmarried tax filer (using the head of household filing status) if he or she fulfills three rules.

First, the separated spouses must have lived apart for the last six months of the year. Second, the separated spouse claiming the EITC must have lived with the qualifying child (or children) for more than six months of the year. Third, the separated spouse claiming the EITC must meet the "household maintenance test." This test requires tax filers to show that they pay more than half of household expenses from their own income. Child support payments and public program benefits do not count as part of their own income. This "household maintenance test" may limit the ability of a poor working separated spouse with children—who may receive a significant amount of income from child support and public benefits—from claiming the EITC for unmarried individuals.

H.R. 2116 would allow certain married tax filers who are living separately to claim the EITC without needing to meet the requirements of the "household maintenance test." Specifically, if a married individual resides with the couple's qualifying children for more than half the year and either has a legally binding separation agreement or lives apart from a spouse for the last six months of the year, he or she may claim the EITC as an unmarried individual with qualifying children. If the other spouse does not live with a qualifying child, he or she remains ineligible for the EITC, including the EITC for childless workers.

Allowing Tax Filers to Increase the Credit Amount by Deducting the Income of the Lesser-Earning Spouse

Under current law, married EITC recipients calculate the value of their credit based on their combined earnings. Dual-earner families may find that their combined income pushes them into the phase-out range of the credit (see Figure 1 for a graphical representation of the phase-out range), resulting in a smaller credit in comparison to the combined amount of the credits of two unmarried EITC recipients. In these cases, reducing the recipient's earned income for purposes of calculating the EITC could yield a larger credit.

S. 2162 includes a proposal that would allow dual-earner couples with at least one child to reduce their earned income for the purposes of calculating the EITC. This provision—the "dual earner deduction"—would allow the tax filer to reduce earnings by an amount equal to 20% of the earned income of the spouse with the lesser earnings, up to a maximum deduction of $12,000. For example, if a married couple with one child earned $25,000 and $10,000 respectively, their earnings amount for purposes of calculating the EITC would be $35,000 under current law. If they applied the dual-earner deduction, their earnings would instead be $33,000 ($25,000 plus $8,000), which would result in a larger EITC. Specifically, in 2014, this couple's EITC would be $1,749 using the dual-earner deduction, instead of $1,429 without the deduction.

Other Legislative Changes

Several bills, including H.R. 4117 , H.R. 2116 , and Chairman Camp's tax reform proposal, include changes to the EITC that are not solely dependent on whether the EITC claimant does or does not have qualifying children.

Allowing Residents of Puerto Rico and American Samoa to Benefit from the EITC

Under current law, individuals who live in U.S. territories (CNMI, American Samoa, the U.S. Virgin Islands (USVI), Guam, and Puerto Rico) cannot claim the federal EITC.

H.R. 4117 would require the Secretary of the Treasury to transfer revenue to Puerto Rico and American Samoa that would be equal to the total amount of EITC benefits Puerto Rican and American Samoan residents could claim if they were eligible for the credit. This provision would not apply to the other U.S. territories (including CNMI, USVI, and Guam). Puerto Rico and American Samoa would be required to provide the U.S. Treasury with a plan for how it would distribute the aggregate funds. The legislation does not provide a method or formula that Puerto Rico and American Samoa must use when distributing this money to Puerto Rican and American Samoan residents.

Eliminating the Investment Income Test

Under current law, eligible EITC recipients cannot have investment income greater than $3,350 in 2014. Investment income includes interest income (including tax-exempt interest), dividends, net rent, and royalties that are from sources other than the filer's ordinary business activity, net capital gains, and passive income.

H.R. 2116 would repeal this limitation.

Chairman Camp's Tax Reform Proposal

Among its many changes to the income tax code, the House Ways and Means Committee Chairman Camp tax reform proposal (hereinafter referred to as the "Camp proposal") would change the structure of and eligibility for the EITC. Specifically, the Camp proposal would reduce the amount of the EITC for most tax filers by reducing the maximum value of the credit and the credit rates, as well as by eliminating the expanded credit for families with three or more children. In addition, the Camp proposal would modify the age limit for the qualifying child for the EITC to under 18 years old, with no exception made for full-time students.

The changes made to the EITC under the Camp proposal, however, would occur in the broader context of comprehensive changes to a wide variety of family- and child-related tax provisions. Given the significant revisions made to the tax code by this proposal, an evaluation of the EITC in isolation would not accurately reflect how tax liabilities would change for tax filers under the proposal. For example, while the EITC is generally reduced in size, the child tax credit, standard deduction, and 10% tax bracket are all expanded. These legislative changes may offset or even exceed any reductions in the EITC for certain tax filers, especially those with children. Hence, some low-income workers who claim the EITC would see their tax liabilities fall under the Camp proposal, while others would see their tax liabilities increase.

The Joint Committee on Taxation found that beginning in 2017, tax filers with income under $20,000—which would likely include many EITC recipients—would on average see a reduction in their taxes. However, an analysis of the Camp proposal by the Tax Policy Center highlighted that the actual impact of the proposal on individual taxpayers would depend on their particular circumstances, including their income, number and age of any qualifying children (and whether they were college students or not), and filing status.

Appendix. Inflation Adjustments in the EITC and Legislative Proposals in the 113th Congress

Several parameters of the EITC are listed at statutory levels in the tax code and then adjusted annually for inflation using a cost-of-living adjustment (COLA) specified in Section (1)(f)(3) of the Internal Revenue Code (IRC). Under current law, the COLA for any year is the percentage (if any) by which the consumer price index (CPI) for the preceding calendar year exceeds the CPI for the calendar year, referred to as the "base year." Hence, the inflation factor used to adjust statutory levels to 2014 levels is the ratio of the CPI for 2013 divided by the CPI for the base year. Different parameters of the EITC can have different base years.

Statutorily, the inflation adjustment for any calendar year is the average of the CPI as of the close of the 12-month period ending on August 31 of such calendar year. Thus, the inflation adjustment for 2013 would be equal to the annual average of the CPI from September 2012 to August 2013.

This report provides an overview of changes to the statutory amounts of the EITC for childless workers that are made by various bills introduced in the 113 th Congress. However, these bills use different "base years" when adjusting parameters for inflation, like the earned income amount, phase-out amount, and marriage penalty relief. In addition, these bills are drafted in such a way that they could, if enacted in 2014, go into effect in different years. Hence, the first time these parameters would be adjusted for inflation may differ. It is unclear under the FY2015 Obama Administration proposal what the base year for inflation adjustments would be, and therefore it is not included in the table.