Earned income tax credit
The Earned Income Tax Credit (EITC) is a refundable federal tax credit in the United States designed to provide financial relief to low- and moderate-income workers by offsetting payroll and income taxes, often delivering payments exceeding tax liabilities through refunds.[1][2] Enacted temporarily in 1975 as part of the Tax Reduction Act to stimulate economic activity amid recession and rising food costs, it was later made permanent and expanded multiple times to prioritize work over traditional welfare dependency.[3][4] The credit's structure features a phase-in range where benefits rise with earnings, a plateau at maximum eligibility, and a phase-out as income exceeds thresholds, with maximum amounts scaled by the number of qualifying children (up to three) and adjusted annually for inflation.[5] Eligibility requires earned income from wages or self-employment, U.S. residency, and investment income limits, excluding most higher earners. Empirical analyses demonstrate the EITC's effectiveness in boosting employment rates—particularly among single mothers—by 5-10 percentage points in affected groups, while reducing child poverty by lifting approximately 5 million people, including 2.5 million children, out of poverty each year through targeted cash transfers tied to work.[6][7][8] Notwithstanding these outcomes, the program's complexity contributes to substantial improper payments, with the Internal Revenue Service estimating rates of 27-33% in recent fiscal years due to taxpayer errors, preparer misconduct, and deliberate fraud such as false child claims or fabricated earnings.[9][10] Critics also highlight disincentives like marriage penalties, where combining incomes can disqualify couples from benefits available to equivalent single filers, potentially discouraging family formation.[11][12] These issues have prompted ongoing reforms to simplify rules and enhance verification without undermining the credit's pro-work incentives.History
Origins and Initial Enactment
The Earned Income Tax Credit (EITC) originated from proposals in the early 1970s aimed at providing tax relief to low-income workers burdened by payroll taxes for Social Security and Medicare, while incentivizing employment over welfare dependency.[13] Senator Russell Long (D-LA), chairman of the Senate Finance Committee, championed a "work bonus plan" that would refund a portion of federal income taxes to working poor families, drawing inspiration from negative income tax experiments and earlier ideas like Milton Friedman's proposals, though adapted to target families with children.[14] This plan passed the Senate in 1972, 1973, and 1974 but stalled in the House, reflecting concerns over its cost and administrative complexity amid debates on welfare reform.[15] The EITC gained traction during the 1974-1975 recession, when Congress sought broad tax cuts to stimulate the economy.[16] Long strategically incorporated elements of his work bonus into the Tax Reduction Act of 1975 (H.R. 2166), a bipartisan bill providing temporary rebates, rate reductions, and credits to offset inflation-driven tax burdens.[17] The House Ways and Means Committee approved the measure on March 14, 1975, after amendments limited the credit's scope to earned income and families with dependent children under age 18, capping it at 10% of the first $4,000 in earnings (up to $400 maximum).[3] President Gerald Ford signed the Tax Reduction Act into law on March 29, 1975, enacting the EITC as a temporary provision effective for tax year 1975, despite his veto of an earlier version of the bill over spending concerns; he accepted the revised package for its fiscal restraint.[17][18] The credit was refundable, allowing eligible taxpayers to receive payments exceeding their tax liability, and was positioned as an alternative to expanding traditional welfare programs by rewarding work.[13] Initially modest in scope, it covered only about 4 million households and cost $1.2 billion in its first year, focusing on reducing poverty traps created by phase-outs in other aid programs.[3] The provision's temporary status was later made permanent by the Revenue Act of 1978 amid ongoing evaluations of its work-promoting effects.[19]Major Expansions and Reforms
The Earned Income Tax Credit (EITC) experienced its first major expansion under the Tax Reform Act of 1986, which indexed the maximum qualifying income and phase-out thresholds to inflation, raised the phase-out rate from 10% to 12%, and increased the maximum credit amount to $1,000 for families with children, thereby broadening eligibility and benefits for low-income workers.[3][20] This reform aimed to offset regressive elements of the tax code while incentivizing employment, with the indexed parameters preventing erosion of real value over time.[16] Further substantial growth occurred through the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990), which approximately doubled the maximum credit for families with one child to $2,000 and provided proportional increases for larger families, alongside raising phase-in and phase-out income limits to extend benefits to more moderate-income households.[3][13] These changes, enacted under President George H.W. Bush, marked a shift toward using the EITC as a primary anti-poverty tool, with expenditures rising sharply in subsequent years.[20] The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) represented the program's most transformative reform to date, increasing the phase-in rate to 40% for one-child families (from 18.5%) and introducing a higher 45% rate for families with two or more children, which elevated the maximum credit to $3,556 for three or more qualifying children while expanding income eligibility thresholds.[3][13] Signed by President Bill Clinton, this expansion targeted deeper poverty alleviation and work incentives for larger families, contributing to a tripling of program costs between 1993 and 2000.[21] In response to the 2008 financial crisis, the American Recovery and Reinvestment Act of 2009 temporarily boosted credit rates by 2 percentage points for families with three or more children and 1.3 points for those with fewer, raising the maximum credit to $5,657 for 2010 only, as a countercyclical measure to stimulate low-wage labor participation.[22][23] Subsequent reforms have been more modest or temporary, including the American Rescue Plan Act of 2021's one-year enhancement for childless workers, which increased the maximum credit from $538 to $1,502, eliminated the investment income limit, and broadened the eligible age range to 19-65, though this provision expired after tax year 2021 without renewal.[24][3] These episodic expansions have periodically adjusted the program's scale in line with fiscal policy priorities, with ongoing debates over sustainability amid rising administrative complexity and error rates.[23]Program Design and Mechanics
Eligibility Requirements
To qualify for the Earned Income Tax Credit (EITC), taxpayers must satisfy a series of tests administered by the Internal Revenue Service, including rules related to residency, identification, income type and amount, and family composition.[25] Eligible individuals must file a federal income tax return and cannot claim the credit if they have claimed the foreign earned income exclusion or exclusion of foreign housing costs. Taxpayers are also ineligible if they have been disqualified due to prior fraudulent or reckless EITC claims, facing a 10-year or 2-year ban, respectively. Eligibility hinges on having earned income, defined as wages, salaries, tips, and net earnings from self-employment, though certain military combat pay may optionally be included as earned income for EITC purposes.[25] Claimants, their spouses (if filing jointly), and any qualifying children must possess valid Social Security numbers issued before the tax return's due date, including extensions; individual taxpayer identification numbers do not suffice.[25] Taxpayers must be U.S. citizens or resident aliens for the full tax year, with nonresident aliens eligible only if married to a U.S. citizen or resident alien and electing joint filing with U.S. tax treatment.[25] They cannot be claimed as a qualifying child or dependent on another taxpayer's return.[25] For claimants with qualifying children, no age restriction applies to the taxpayer, but the children must meet four tests: relationship (son, daughter, stepchild, foster child, sibling, half-sibling, or descendant thereof); age (under 19 at year-end, under 24 if a full-time student, or any age if permanently and totally disabled); residency (living with the taxpayer in the United States for more than half the year, with exceptions for temporary absences, birth or death during the year, or kidnapping); and joint return (not filing a joint return unless solely to claim a refund).[25] Tiebreaker rules prioritize the parent or higher-income claimant if multiple individuals could claim the same child. Without qualifying children, claimants must be aged 25 to 64 at year-end (with at least one spouse meeting this if married filing jointly) and reside in the United States for more than half the year.[25] Income eligibility requires earned income and adjusted gross income (AGI) below annually adjusted phaseout thresholds, which vary by number of qualifying children and filing status; investment income must not exceed $11,000 (for tax year 2023, with inflation adjustments in subsequent years). For tax year 2024, the maximum AGI limits where the credit reaches zero are $18,591 for unmarried filers with no children and $25,511 for married filing jointly with no children; for those with one child, $49,084 and $56,004, respectively; with two children, $55,768 and $62,688; and with three or more, $59,899 and $66,819.[26] Permissible filing statuses include single, head of household, qualifying surviving spouse, or married filing jointly; married filing separately is generally ineligible unless the spouses lived apart for the last six months of the year or are legally separated under a decree.[25] Special provisions apply to certain groups: clergy may treat nontaxable ministerial income as earned income, while disabled individuals qualify as having a qualifying child if the disability meets IRS criteria for total and permanent status, but claimant age rules for childless workers remain unchanged. These requirements, codified in Internal Revenue Code Section 32, are designed to target refundable credits toward working low-income households while excluding non-labor income sources like pensions or certain welfare benefits.Credit Calculation and Refundability
The Earned Income Tax Credit (EITC) is determined through IRS-provided schedules and worksheets that apply a formula based on the taxpayer's earned income or adjusted gross income (whichever is smaller), the number of qualifying children, and filing status.[5] The formula incorporates three income ranges: a phase-in period where the credit increases linearly with rising earned income at a specified rate (e.g., 34% for one qualifying child in recent years), a plateau where the credit remains at its maximum level, and a phase-out period where the credit decreases linearly at a higher rate (e.g., 16% for one child) until it reaches zero.[5] These rates and thresholds are adjusted annually for inflation and published in IRS Publication 596 and related tables.[5] For tax year 2025, the maximum credit amounts are $649 for taxpayers with no qualifying children, $4,328 for one child, $7,152 for two children, and $8,046 for three or more children.[5] The phase-in rate reaches the maximum credit at earned income levels such as approximately $12,700 for one child, after which the plateau holds until the phase-out begins (e.g., around $22,720 for single filers with one child).[5] Phase-out completes at higher adjusted gross income thresholds, varying by filing status and children: for example, $19,104 for single filers with no children, up to $68,675 for joint filers with three or more children.[5]| Number of Qualifying Children | Maximum Credit (2025) | Phase-Out Begins (Single, approx.) | Phase-Out Completes (Joint, 2025) |
|---|---|---|---|
| 0 | $649 | $9,820 | $26,214 |
| 1 | $4,328 | $22,720 | $57,554 |
| 2 | $7,152 | $22,720 | $64,430 |
| 3+ | $8,046 | $22,720 | $68,675 |
Empirical Impacts
Labor Supply and Employment Effects
The Earned Income Tax Credit (EITC) subsidizes earnings for low-income workers, creating a financial incentive to enter the labor force rather than remain out of work, as benefits phase in with initial earnings before phasing out at higher levels.[6] Empirical studies using difference-in-differences designs around major EITC expansions, such as those in 1986 and 1993, consistently find positive effects on the extensive margin of labor supply—namely, increased employment and labor force participation—particularly among single mothers with children.[28] [29] For instance, the 1993 expansion, which raised the maximum credit for families with one child from $1,384 to $2,194 (in 1993 dollars), correlated with a 5-10 percentage point rise in employment rates among single mothers relative to comparable groups.[30] These effects are most pronounced for low-education, unmarried women with children, who form the program's primary target group. A meta-analysis of expansions from 1984 to 2013 estimates that a $1,000 increase in the maximum EITC benefit boosts employment among low-education unmarried mothers by approximately 3.9 percentage points.[31] Heterogeneity exists by family structure and child age: the credit's work incentives are stronger for mothers of young children (under age 6), where employment elasticities reach 0.2-0.3, compared to smaller responses for mothers of older children.[32] For married mothers, effects are smaller or negligible, as the phase-out range can impose effective marginal tax rates exceeding 50% on secondary earners, though overall family labor supply often rises modestly due to primary earner responses.[33] Long-run evidence from cohorts affected by 1990s expansions shows sustained employment gains, with affected single mothers experiencing 4-7% higher annual earnings five years later, alongside reduced welfare receipt.[34] [35] On the intensive margin—hours worked conditional on employment—the EITC shows minimal distortion. Studies find no significant change in weekly hours for single mothers already in the labor force, as the phase-in subsidy encourages participation without strongly altering effort levels once employed; any small reductions in hours are offset by income effects.[30] [36] This neutrality aligns with labor supply theory, where the credit's structure rewards earnings up to a plateau, avoiding strong disincentives for additional work in the eligible range. However, some reappraisals, incorporating concurrent policies like welfare reform, suggest the employment effects may be overstated by 20-50% in earlier estimates, attributing part of the rise to broader economic shifts rather than the EITC alone.[37] Despite such debates, the consensus from quasi-experimental designs holds that the program's net impact is pro-work, with employment elasticities for targeted groups around 0.1-0.2 overall.[38]Poverty Reduction and Income Distribution
The Earned Income Tax Credit (EITC) has demonstrably reduced poverty rates among eligible low-income working families, particularly those with children, by providing refundable payments that supplement earnings and push household income above federal poverty thresholds. According to analyses of Census Bureau data, the EITC lifted approximately 5 to 6 million individuals out of poverty annually in recent years, with more than half being children, representing one of the program's primary antipoverty mechanisms.[39] A 2016 study by economists Hilary Hoynes and Ankur Patel found that a policy-induced $1,000 increase in EITC benefits reduced the share of families with after-tax-and-transfer income below the poverty line by 8.4 percentage points, with effects concentrated among households earning between 75% and 150% of the poverty threshold.[40] These reductions are most pronounced for single-parent families; for instance, a Congressional Research Service report indicated that the EITC lowered the poverty rate for unmarried households with three children from 40.5% to 32.3%, a 20.2% relative decline.[41] Regarding child poverty specifically, longitudinal evidence suggests sustained benefits, including intergenerational effects. Exposure to higher EITC benefits during childhood correlates with a lower likelihood of living in poverty as an adult, as documented in a 2023 National Bureau of Economic Research (NBER) working paper, which linked cumulative childhood EITC exposure to reduced adult poverty rates, particularly in the second income quartile (25th-50th percentile, around $45,000 annually).[42] The program's refundability ensures cash flow to families below the phase-in range, enabling poverty escapes that non-refundable credits cannot achieve, though effectiveness diminishes for the deepest poverty (below 50% of the threshold) compared to programs like SNAP.[43] When combined with the Child Tax Credit, the EITC's poverty-alleviating role extends further, but standalone EITC impacts remain targeted at working-age households, lifting millions above the Supplemental Poverty Measure (SPM) line without displacing other transfers.[44] On income distribution, the EITC modestly compresses inequality by augmenting wages at the lower end of the distribution, though its work-conditioned structure limits reach to non-participants. Hoynes and Patel's analysis showed minimal effects on the lowest income deciles but notable boosts for near-poor workers, helping to moderate gaps between the working poor and higher earners.[45] NBER research confirms that EITC expansions have not significantly altered overall Gini coefficients but have stabilized community-level income volatility in high-poverty areas by injecting funds tied to local employment.[46] Critically, these distributional gains hinge on labor supply responses; without employment, benefits accrue minimally, distinguishing the EITC from unconditional transfers and underscoring its role in rewarding work over passive aid.[45] Recent expansions, such as those for childless workers under the American Rescue Plan Act of 2021, further extended these effects to non-parental low earners, reducing material hardship without broadly reshaping top-end inequality.[47]Family Structure and Marriage Incentives
The Earned Income Tax Credit (EITC) generates marriage disincentives for many low-income households due to its phase-out structure, which reduces or eliminates benefits as combined earnings exceed thresholds, often resulting in lower total credits for married couples than for unmarried cohabiting or separate filers. For instance, a couple with one child where both partners earn $25,000 annually may face a $3,117 reduction in EITC benefits upon marriage, as their joint income pushes them into the phase-out range faster than individual filings would.[12] Penalties are more prevalent than bonuses, affecting 44-48% of eligible families with children and averaging $1,325 to $2,201 annually depending on family size and child age, based on analysis of Fragile Families data from the early 2000s.[48] These effects are pronounced for cohabiting couples with similar earnings, where penalties can exceed 12% of income, though bonuses arise if one spouse has minimal earnings.[48] Empirical studies indicate modest and mixed behavioral responses to these penalties, with some evidence of reduced marriage probabilities but overall limited causal impact on family formation rates. A $1,000 increase in the EITC marriage penalty correlates with a 1.7-1.9 percentage point decline in marriage likelihood, rising to 2.7 points for non-college-educated individuals, drawing from panel data on low-income couples.[12] Single EITC-eligible mothers facing penalties are 2.7 percentage points less likely to marry, per analysis of 1990s reforms using Current Population Survey data.[12] However, major EITC expansions in the 1990s showed no significant change in marriage or cohabitation rates among low-skilled single mothers.[12] Contrarily, variation in state EITC supplements from 1980-2013 data reveals a positive effect, where a 10 percentage point increase in state rates raises next-year marriage probability by 1.5 percentage points (2.9% relative increase) among eligible households, potentially offsetting penalties through income boosts that enhance stability.[49] On family structure, EITC exposure influences fertility and timing of unions rather than outright dissolution. State EITC increases boost the likelihood of an additional child within two years by 2.3 percentage points (13% relative) for a 10 percentage point rate hike, concentrated among younger, lower-educated recipients, suggesting incentives for larger families to maximize credits.[49] Childhood EITC receipt, simulated via NBER tax models, delays women's marriage and first births by ages 16-25, with a $1,000 exposure increase reducing early marriage odds by effects equivalent to shifting outcomes later in adulthood, but shows no impact on men.[50] These patterns align with the program's child-focused design, which rewards parenthood but penalizes certain unions, though penalties may promote cohabitation over formal marriage without substantially altering overall family stability, as broader welfare interactions (e.g., Medicaid cliffs) amplify disincentives more than EITC alone.[12] Studies consistently find small magnitudes, implying cultural, social, or economic factors dominate over tax incentives in shaping low-income family decisions.[48][12]Health and Child Welfare Outcomes
Studies exploiting expansions of the federal EITC in the late 1990s have found that eligibility for higher credits among low-income pregnant women is associated with improved infant health at birth, including a reduction in low birth weight incidence by approximately 1-2 percentage points and an increase in mean birth weight by 10-20 grams for single mothers with no more than a high school education.[51] Similar quasi-experimental analyses of state EITCs indicate that a 10 percentage-point increase in refundable state credits correlates with an 8-gram rise in average birth weight and a 0.05-week extension in gestational length, alongside reductions in maternal smoking rates during pregnancy.[52] These effects are attributed to increased prenatal resources enabling better nutrition and reduced stress, though they are most pronounced among disadvantaged subgroups and do not uniformly extend to all maternal education levels.[53] Beyond infancy, childhood exposure to EITC benefits through family income gains has been linked to modest improvements in physical health measures, such as lower rates of obesity and better self-reported health in adolescence, based on longitudinal data from cohorts affected by 1993-2007 federal expansions.[54] However, short-term evaluations of EITC refund timing show limited associations with immediate pediatric health metrics like emergency department visits or hospitalizations, suggesting that sustained income effects may drive longer-term benefits rather than acute refunds.[55] Long-term adult health outcomes from childhood EITC exposure remain understudied, with preliminary evidence indicating potential reductions in metabolic conditions but requiring further causal validation.[56] EITC-induced income increases have also correlated with declines in child maltreatment indicators, including substantiated reports of neglect and involvement with child protective services (CPS). Analyses of state-level EITC variations estimate that a $1,000 per capita increase in credits reduces overall maltreatment reports by 3-5% and neglect specifically by up to 10%, with stronger effects in unmarried families where economic stress exacerbates risks.[57] Correspondingly, higher EITC generosity is associated with 5-8% fewer entries into foster care, as measured in administrative data from states with refundable credits.[58] These patterns hold across multiple studies using difference-in-differences designs, though effect sizes vary by credit generosity and demographic focus, and no significant impacts on physical or sexual abuse rates have been consistently observed.[59]Fiscal Costs and Administrative Issues
Program Expenditures Over Time
The Earned Income Tax Credit (EITC) program has seen substantial growth in expenditures since its inception in 1975, driven by legislative expansions, inflation adjustments, and increases in eligible families. Initial outlays totaled $5.07 billion, benefiting 6.2 million recipients.[60] By 1999, expenditures reached $31.9 billion across 19.3 million returns.[61] This growth accelerated with major reforms in the 1980s and 1990s, culminating in $59.2 billion for 27.0 million returns in 2009 and $60.9 billion for 27.8 million in 2010.[60][61] Expenditures peaked at $68.5 billion in 2015 before stabilizing amid economic cycles and policy tweaks.[61] In tax year 2020, outlays stood at $59.0 billion for 26.0 million returns, rising to $64.0 billion for 31.0 million in 2021 due to pandemic-related expansions and filing patterns.[61] By 2022, expenditures declined to $57.0 billion across 23.0 million returns, reflecting a return to pre-pandemic levels.[61] The following table summarizes key historical expenditure data in nominal dollars:| Tax Year | Total Expenditures (billions USD) | Returns with EITC (millions) |
|---|---|---|
| 1975 | 5.07 | 6.2 |
| 1999 | 31.9 | 19.3 |
| 2009 | 59.2 | 27.0 |
| 2010 | 60.9 | 27.8 |
| 2015 | 68.5 | N/A |
| 2020 | 59.0 | 26.0 |
| 2021 | 64.0 | 31.0 |
| 2022 | 57.0 | 23.0 |
Improper Payments, Fraud, and Error Rates
The Earned Income Tax Credit (EITC) has consistently exhibited one of the highest improper payment rates among federal programs, defined under the Payment Integrity Information Act of 2019 as payments that should not have been made or were made in incorrect amounts, including both overpayments and underpayments. For fiscal year 2023, the Internal Revenue Service (IRS) estimated an improper payment rate of 33.5 percent for the EITC, totaling approximately $21.9 billion in erroneous disbursements out of $65.3 billion in total payments. This rate marked an increase from prior years and exceeded the government-wide threshold for high-risk programs, which triggers mandatory corrective action plans. In fiscal year 2024, the estimated rate declined slightly to 27.3 percent, though it remained substantially above historical lows and reflected ongoing challenges in verification.[63][9][64] Improper payments in the EITC arise primarily from claimant errors rather than deliberate fraud, with IRS analyses attributing about 50-60 percent of overclaims to mistakes in qualifying child criteria, such as incorrect assertions of residency, relationship, or age. Income underreporting and filing status errors account for another 20-30 percent, often exacerbated by the program's complex phase-in and phase-out schedules that require precise documentation. Fraudulent claims, while comprising a smaller share (estimated at 10-15 percent by Treasury Inspector General for Tax Administration audits), include fabricated dependents, identity theft to claim ineligible refunds, and collusion with unscrupulous tax preparers who exploit refund anticipation loans. These issues persist despite IRS efforts like mandatory pre-certification for high-risk filers since 2011, which reduced error rates temporarily but failed to sustain declines below 22 percent since fiscal year 2010.[65][66] Government Accountability Office (GAO) reviews have highlighted systemic administrative shortcomings, including inadequate data matching with third-party sources like state vital records and limited real-time verification during tax season, contributing to the EITC's designation as a high-error program for over two decades. The Treasury Inspector General for Tax Administration (TIGTA) reported that EITC error rates fluctuated between 23 percent and 34 percent from fiscal years 2003 to 2024, with no sustained progress attributable to underfunding of compliance staff and overreliance on post-payment audits that recover only a fraction of overpayments—estimated at less than 20 percent annually. Critics, including the National Taxpayer Advocate, argue that the refundable nature of the credit incentivizes aggressive claiming, as recipients receive funds before full verification, amplifying losses when errors are detected post-refund.[67][68][69]| Fiscal Year | Estimated Improper Payment Rate (%) | Estimated Improper Payments ($ billions) |
|---|---|---|
| 2020 | 24.0 | 16.0 |
| 2021 | 25.5 | 18.2 |
| 2022 | 28.1 | 19.5 |
| 2023 | 33.5 | 21.9 |
| 2024 | 27.3 | ~20.0 (projected) |