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tax topics

2012 Budget

Extend 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 $5,112 to $5,751 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 $5,080 above the thresholds for single filers in 2011. The president proposes to make both changes permanent and to index for inflation the $5,080 higher phaseout threshold for married couples filing jointly.

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 $12.3 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