Question

20. What is the Government’s policy intent with respect to the earned income tax credit? What are some of the key factors that determine the amount of the earned income tax credit? (Country United States)

Answer 1

Government’s policy intent with respect to the earned income tax credit

EITC phases in slowly, has a medium-length plateau, and phases out more slowly than it was phased in. Since the credit phases out at 21% (more than one qualifying child) or 16% (one qualifying child), it is always preferable to have one more dollar of actual salary or wages considering the EITC alone. (Investment income, however, is handled far less gracefully, as one more dollar of income can result in the sudden 100% loss of the entire credit.) If the EITC is combined with multiple other means-tested programs such asMedicaid or Temporary Assistance for Needy Families, it is possible that the marginal tax rate approaches or exceeds 100% in rare circumstances depending on the state of residence; conversely, under certain circumstances, net income can rise faster than the increase in wages because the EITC phases in.

For tax year 2019-2020, the maximum EITC benefit for a single person or couple filing without qualifying children is $529. The maximum EITC with one qualifying child is $3,526; with two children, it is $5,828; and with three or more qualifying children, it is $6,557.These amounts are indexed annually for inflation.

The earned income tax credit has been part of political debates in the United States over whether raising the minimum wage or increasing EITC is a better idea. In a random survey of 568 members of the American Economic Association in 2018, roughly 60% of economists agreed (31.7%) or agreed with provisos (30.8%) that the earned income tax credit program should be expanded.

key factors that determine the amount of the earned income tax credit

1. Have a Social Security Number that is valid for employment.
2. Have earned income from working for someone, running or owning a business or farm or another source.
3. Cannot file as married filing separate.
4. Must be:
   • a U.S. citizen or resident alien all year or
   • a nonresident alien married to a U.S. citizen or resident alien, file a joint return and choose to be treated as a resident alien (for more information on making this choice,
5. Cannot be the qualifying child of another person.
6. Cannot file Form 2555 or 2555-EZ (related to foreign earned income).
7. Your Adjusted Gross Income and earned income must meet the limits shown on the Earned Income Tax Credit Income and Maximum Credit Amounts page.
8. Your investment income must meet or be less than the amount listed on the Earned Income Tax Credit Income and Maximum Credit Amounts page.