Skip to main content
  • Experts
  • Events
  • Briefing Book
  • Resources
  • About
  • Contact
  • Support
  • Fiscal Facts
Twitter
Facebook
Logo Site
  • Topics
    • Individual Taxes
    • Business Taxes
    • Federal Budget and Economy
    • State and Local Issues
    • Campaigns, Proposals, and Reforms
  • TaxVox Blog
  • Research & Commentary
  • Laws & Proposals
  • Model Estimates
  • Statistics
  • Features

The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

Key Elements of the U.S. Tax System

  • Briefing Book
  • Taxes and the Family
  • What is the earned income tax credit?
  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have budget trends been over the short and long term?
        • How much spending is uncontrollable?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What are the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the distributional analyses of tax cuts?
        • How do taxes affect income inequality?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the TCJA affect tax expenditures?
      • Tax Gap and Tax Shelters
        • What is the tax gap?
        • What does the IRS do and how can it be improved?
        • What is a tax shelter?
      • Recent History of the Tax Code
        • What did the 2008–10 tax stimulus acts do?
        • What did the American Taxpayer Relief Act of 2012 do?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • What is carried interest, and how is it taxed?
        • How might the taxation of capital gains be improved?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • What are premium tax credits?
        • What tax changes did the Affordable Care Act make?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
        • What are health reimbursement arrangements and how do they work?
        • How might the tax exclusion for employer-sponsored health insurance (ESI) be reformed?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Transfer Taxes
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
      • Tax Incentives for Economic Development
        • What is the new markets tax credit, and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
        • What are Opportunity Zones and how do they work?
      • Taxes and Multinational Corporations
        • How does the current system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how will TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is global intangible low-taxed income and how is it taxed under the TCJA?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • What is the difference between a tax-exclusive and tax-inclusive sales tax rate?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the flat tax?
        • What is the X-tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2015
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What are the benefits of return-free filing?
        • What are the drawbacks of return-free filing?
        • How would the tax system need to change with return-free filing?
        • Who would qualify for return-free filing?
        • Would return-free filing raise taxes?
        • What was the experience with return-free filing in California?
        • What other countries use return-free filing?
    • The State of State (and Local) Tax Policy
      • State and Local Revenues
        • What are the sources of revenue for state governments?
        • What are the sources of revenue for local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local sales taxes work?
        • How do state and local property taxes work?
        • How do state and local corporate income taxes work?
        • How do state estate and inheritance taxes work?
        • How do state earned income tax credits work?
        • How do state and local severance taxes work?
        • How do state and local soda taxes work?
        • How do marijuana taxes work?
      • Fiscal Federalism and Fiscal Institutions
        • How does the deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds, and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

What is the earned income tax credit?

Taxes and the Family

<3/7>
Individual Taxes
Q.

What is the earned income tax credit?

A.

The earned income tax credit subsidizes low-income working families. The credit equals a fixed percentage of earnings from the first dollar of earnings until the credit reaches its maximum. The maximum credit is paid until earnings reach a specified level, after which it declines with each additional dollar of income until no credit is available. 

HOW THE EARNED INCOME TAX CREDIT WORKS

The earned income tax credit (EITC) provides substantial support to low- and moderate-income working parents who claim a qualifying child based on relationship, age, residency, and tax filing status requirements. It previously provided very little support to workers without qualifying children (often called childless workers), but the American Rescue Plan (ARP) significantly expanded the credit for these workers through 2021.

By design, the EITC only benefits people who work. Workers receive a credit equal to a per-centage of their earnings up to a maximum credit. Both the credit rate and the maximum credit vary by family size, with larger credits available to families with more children. In 2021, the maximum credit for families with one child is $3,618, while the maximum credit for families with three or more children is $6,728. The maximum credit for childless workers is $1,502, roughly triple what is was prior to the ARP.

After the credit reaches its maximum, it remains flat until earnings reach the phaseout point. Thereafter, it declines with each additional dollar of income until no credit is available (figure 1). 

Line graph showing earned income tax credit for tax units with 1, 2, and 3-plus children, and comparing credit for childless families before and after the American Rescue Plan, by income in 2021.

Prior to the ARP, childless workers could receive a maximum credit of only $543 in 2021 and the credit phased out at lower income levels. The credit was limited to workers between the ages of 25 and 64. The ARP’s expanded childless EITC is only in effect in 2021.

Despite expansions under the ARP, the EITC for childless workers remains limited compared to the credit for families with children. The credit phases out at lower incomes and age restrictions apply. Childless workers must be at least age 19 (18 if formerly a foster child or homeless) to qualify for the credit, or at least age 24 if the filer is a half-time or more student in at least five months of the year. As a result of these tighter eligibility rules and a smaller maximum benefit, 83 percent of benefits from the EITC go to families with children.

For all workers, regardless of family size, the tax filer’s investment income must be below $10,000 to be eligible for the EITC. The ARP increased that limit from $3,650 under prior law. That change does not expire after one year.

IMPACT OF THE EITC

In general, research shows that the EITC encourages single people and primary earners in married couples to work (Dickert, Houser, and Scholz 1995; Eissa and Liebman 1996; Meyer and Rosenbaum 2000, 2001). The credit, however, appears to have little effect on the number of hours worked once people are employed. Although the EITC phaseout could cause people to reduce their hours (because credits are lost for each additional dollar of earnings, which is effectively a surtax on earnings in the phaseout range), there is little empirical evidence of this happening (Meyer 2002).

The one group of people that may reduce hours worked in response to EITC incentives is lower-earning spouses in married couples (Eissa and Hoynes 2006). On balance, though, the increase in work resulting from the EITC far outweighs the decline in labor participation among secondary earners in married couples.

Some recent analysis sheds some doubt on the magnitude of EITC work incentives (Kleven 2020). Possibly, a strong economy and welfare reform played a larger role in increasing work for single mothers during the 1990s, when most EITC studies found the credit increased work. However, subsequent analysis found robust evidence that the EITC encouraged people to work (Schanzenbach and Strain 2020).

When calculating the official poverty measure, tax credits are typically not included. However, if the EITC were treated like earnings, it would have been the single most effective antipoverty program for working-age people, lifting about 5.6 million people out of poverty in 2018, including 3 million children (CBPP 2019).

The EITC is concentrated among the lowest earners, with almost all of the credit going to households in the bottom three quintiles of the income distribution (figure 2). (Each quintile contains 20 percent of the population, ranked by household income.) Very few households in the fourth quintile receive an EITC (fewer than 2 percent), and none in the top quintile.

Bar chart contrasting pre- and post-American Rescue Plan average earned income tax credit, for each income quintile and for all households in 2021.

RECENT CHANGES

The American Rescue Plan, enacted in March 2021, expanded the childless EITC for 2021 in several ways. The maximum credit for childless workers increased from $543 to $1,502. Single filers with incomes up to about $21,000 and joint filers with income up to about $27,000 were made eligible for the EITC, up from $16,000 for single people and $22,000 for married couples under previous law. The minimum eligibility age for the credit was lowered from age 25 to 19 for most workers, to 24 for students attending school at least half-time, and to 18 for former foster children and homeless youth. The restriction on filers ages 65 and older claiming the credit was removed. All of these changes are set to expire at the end of the year.

As a result of legislation enacted in 2001, the EITC phases out at higher income levels for married couples than for single individuals. That threshold was increased as part of the American Recovery and Reinvestment Act of 2009 (ARRA). The same act increased the maximum EITC for workers with at least three children. The American Taxpayer Relief Act of 2012 made the 2001 EITC changes permanent (a $3,000 higher (indexed) phaseout threshold for married couple than for singles) but extended the ARRA changes (a $5,000 higher (indexed) phaseout threshold for married couple than for singles, and higher credit maximum for workers with at least three children) through the end of 2017. The Protecting Americans from Tax Hikes Act of 2015 made these changes permanent. The Tax Cuts and Jobs Act, enacted in 2017, adopted a more conservative measure of inflation to be used in the federal income tax system beginning in 2018. As a result, the EITC will grow more slowly over time.

PROPOSALS FOR REFORM

The changes in the American Rescue Plan for childless workers are similar to reforms previously proposed by both congressional Democrats and Republicans (Marr 2015; Maag and Airi 2020). Democratic policy makers have already begun calling for making the expansions to the credit for childless workers permanent. 

A more far-reaching approach to reform that would still expand benefits to childless workers would be to separate the credit into two pieces—one focused on work and one focused on children. There are many examples of this type of reform proposal, including the President’s Advisory Panel on Federal Tax Reform (2005), the Bipartisan Policy Center (2013), and Maag (2015b).

ERROR RATES AND THE EITC

The EITC likely delivers more than a quarter (28.5 percent) of all payments in error, according to a recent Internal Revenue Service (IRS) compliance study. The largest source of error was determining whether a child claimed for the EITC actually qualified (IRS 2014). The child must live with the parent (or other relative) claiming the EITC for more than half of the year to qualify. The IRS receives no administrative data that can verify where a child resided the majority of the year, making it difficult for the agency to monitor compliance. Attempts to use administrative data from other programs to verify child residence have not proven successful (Pergamit et al. 2014).

To reduce fraud, the Protecting Americans from Tax Hikes Act of 2015 requires the IRS to de-lay tax refunds for taxpayers who claim an EITC or additional child tax credit on their returns until at least February 15. Delaying refunds was paired with a requirement that third-party in-come documents related to wages and income be provided to the IRS by January 31 (in prior years, this information was due the last day of February for paper filing and March 31 for electronic filing, and employers were automatically granted a 30-day extension, if requested). As a result, information needed to verify wages often got to the IRS well after the first returns had been processed. Together, these measures allowed earlier systemic verification of EITC claims, which protected more revenue than in prior years (Treasury Inspector General for Tax Administration 2018).

Updated May 2021
Data Sources

Urban-Brookings Tax Policy Center. “TPC Microsimulation Model, version 0920-2.”  

Further Reading

Bipartisan Policy Center. 2013. “Bipartisan Policy Center (BPC) Tax Reform Quick Summary.” Washington, DC: Bipartisan Policy Center.

CBPP (Center on Budget and Policy Priorities). 2019. “Policy Basics: The Earned Income Tax Credit.” Washington DC: Center on Budget and Policy Priorities.

DaSilva, Bryann. 2014. “New Poverty Figures Show Impact of Working-Family Tax Credits.” Off the Charts (blog). October 17.

Dickert, Stacy, Scott Houser, and John Karl Scholz. 1995. “The Earned Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation.” Tax Policy and the Economy¸ volume 9. Cambridge MA: MIT Press.

Eissa, Nada, and Hilary Hoynes. 2006. “Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply.” Working Paper 11729. Cambridge, MA: National Bureau of Economic Research.

Eissa, Nada, and Jeffrey B. Liebman. 1996. “Labor Supply Response to the Earned Income Tax Credit.” Working Paper 5158. Cambridge, MA: National Bureau of Economic Research.

Executive Office of the President and Department of the Treasury. 2014. “The President’s Proposal to Expand the Earned Income Tax Credit.” Washington, DC: The White House.

IRS (Internal Revenue Service). 2014. “Compliance Estimates for the Earned Income Tax Credit Claimed on 2006–2008 Returns.” Washington, DC: Internal Revenue Service.

Kleven, Henrik. 2020. “The EITC and the Extensive Margin: A Reappraisal.” Working Paper 26405. Revised, first issued October 2019. Cambridge, MA: National Bureau of Economic Research.

Maag, Elaine and Nikhita Airi. 2020. Understanding the Maze of Recent Child and Work Incentive Proposals. Washington, DC: Tax Policy Center.

Maag, Elaine. 2015a. “Earned Income Tax Credit in the United States.” Journal of Social Security Law 22 (1).

———. 2015b. “Investing in Work by Reforming the Earned Income Tax Credit.” Washington, DC: Urban Institute.

Marr, Chuck. 2015. “EITC Could be Important Win for Obama and Ryan.” Washington, DC: Center on Budget and Policy Priorities.

Meyer, Bruce D. 2002. “Labor Supply at the Extensive and Intensive Margins: The EITC, Welfare, and Hours Worked.” American Economic Review 92 (2): 373–79.

Meyer, Bruce D., and Dan T. Rosenbaum. 2000. “Making Single Mothers Work: Recent Tax and Welfare Policy and Its Effects.” National Tax Journal (53): 1027–62.

———. 2001. “Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers.” Quarterly Journal of Economics 116 (3): 1063–1114.

Pergamit, Mike, Elaine Maag, Devlin Hanson, Caroline Ratcliff, Sara Edelstein, and Sarah Minton. 2014. “Pilot Project to Assess Validation of EITC Eligibility with State Data.” Washington, DC: Urban Institute.

President’s Advisory Panel on Federal Tax Reform. 2005. “Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System.” Washington, DC: US Department of the Treasury.

Schanzenbach, Diane Whitmore, and Michael R. Strain. 2020. “Employment Effects of the Earned Income Tax Credit: Taking the Long View.” Working Paper 28041. Cambridge, MA: National Bureau of Economic Research.

Sherlock, Molly F., Margot L. Crandall-Hollick, and Jane G. Gravelle. 2021. “The American Rescue Plan Act of 2021 (ARPA; H.R. 1319) Title IX Subtitle G—Tax Provisions Related to Promoting Economic Security.” Congressional Research Service. Washington, DC: Library of Congress.

Short, Kathleen. 2013. “The Research Supplemental Poverty Measure: 2012.” Current Population Reports P60-247. Washington, DC: US Census Bureau.

Treasury Inspector General for Tax Administration. 2018. “Employer Noncompliance with Wage Reporting Requirements Significantly Reduces the Ability of Verify Refundable Tax Credit Claims Before Refunds are Paid.” Reference No. 2018-40-015. Washington, DC: Department of the Treasury. 

Individual Taxes
Earned income tax credit (EITC)
  • ‹Read Previous What is the adoption tax credit?
  • Read Next› Do all people eligible for the EITC participate?
  • Donate Today
  • Topics
  • TaxVox Blog
  • Research & Commentary
  • Laws & Proposals
  • Model Estimates
  • Statistics
  • Privacy Policy
  • Newsletters
Twitter
Facebook
  • © Urban Institute, Brookings Institution, and individual authors, 2022.