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Extend the Earned Income Tax Credit for Larger Families

The economic stimulus act (“American Recovery and Reinvestment Act of 2009”) increased the earned income tax credit rate for working families with three or more children from 40 percent to 45 percent in 2009 and 2010. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 subsequently extended that increase for two years and consequently increased the maximum credit for families with three or more children from $5,236 to $5,891 in 2011. The act also increased the phaseout income levels for all married couples filing a joint tax return (regardless of the number of children) to $5,210 above the thresholds for single filers in 2011. The president proposes to make both changes permanent and to index for inflation the $5,210 higher phaseout threshold for married couples filing jointly. This proposal repeats a proposal made in the prior budget.

The higher credit rate for larger families could induce them to work more, although research suggests any impact would be small. Lengthening the phaseout range would change which families face higher marginal tax rates because of the phaseout, but have only small effects on overall work effort. The main effect of the proposal would be to increase after-tax incomes of affected families. The provision would cost an estimated $14 billion over the next decade.

Additional Resources

Tax Policy Briefing Book: Taxation and the Family: What is the Earned Income Tax Credit?
Stimulus Act Report Card: Increase in Earned Income Tax Credit

Simplify the rules for claiming the EITC for workers without qualifying children

The Earned Income Tax Credit (EITC) provides a wage subsidy that varies based on number of children and marital status. Although almost all EITC benefits accrue to workers with children, workers without a qualifying child (who may or may not be parents) can qualify for a small credit. In 2012, the maximum credit for a family with children could be as high as $5,891 while the maximum credit available to a worker without a qualifying child is set at $475.

Individuals living with qualifying children – even if they are unable to claim that child for their own EITC – are barred from claiming the EITC for workers without children. This happens, for example, when an uncle lives with his sister whose child qualifies her for the EITC. Under current law, the uncle may not claim the credit because he lives with a child whom someone else in the household may claim. The administration proposes to eliminate this provision and thus simplify the EITC eligibility criteria for workers without children.

Complexity drives much of the criticism of the EITC and results in errors related to claiming the credit. This simplification would likely reduce error rates associated with the EITC, though it would also decrease some targeting of the credit. The provision is expected to cost $5.4 billion over the next 10 years.