The Earned Income Credit: Largest Federal Anti-Poverty Program

The earned income tax credit (EITC) is a federal program started in 1975 that is designed to encourage low-income individuals to work by reducing their tax burden. Taxpayers eligible for the credit can receive it even if it is more than their tax liability; the credit is fully refundable.

Originally, the program was temporary, and benefiting only 6.2 million taxpayers. Today, the program covers 27 million taxpayers; they received $59.2 in tax credits (for 2009, the latest year for statistics). The credit is not permanent, although some favorable provisions are scheduled to expire after 2017.

Eligibility for the EITC is based on income (earned income and adjusted gross adjusted gross income must be below set limits; investment income cannot exceed a limit) and the number of qualifying children, if any. There are also age (if no qualifying child, then the taxpayer must be at least 25 years old but not older than 64) and residence requirements (must reside in the United States, with a military service exception). The limits and, in turn, the maximum credit amounts, change annually with inflation.

At present, 25 states and the District of Columbia have their own EITCs for state income tax purposes. In some cases, the state credit is based on the amount of the federal EITC.

Data fail to show whether the EITC is effective as an antipoverty program (one that lifts a person above the poverty level). In some cases, the answer is yes, while in others, no. For example, because of the credit limitations, a single filer with no qualifying child who works full time at the minimum wage would have too much income to qualify for any credit, while still falling below the minimum wage.

Taxpayers who may be eligible for the EITC can use an interactive online tool to check.

Source: http://services.taxanalysts.com/taxbase/tnt3.nsf/Current+Edition/1323214A234FE90185257B14000AAFC0?OpenDocument