Do you know whether you’re eligible for the Earned Income Tax Credit? For the EITC to work as Congress intended, it’s important that eligible taxpayers are aware of the credit and know how to properly claim it. One of the steps that the IRS has taken to educate taxpayers and tax preparers is designating an EITC Awareness Day—which is today. So, the WatchBlog is taking a look at some of our work on the EITC.
What is the EITC?
The EITC was enacted in 1975 to encourage low-income families to seek employment rather than public assistance. The credit reduces the amount of tax a family owes. The size of the credit depends on how much money the family makes and its size and structure. If the credit is more than the family owes, the excess is paid out to the family as a tax refund.
Research shows the EITC has helped millions of low-income families move out of poverty, with these benefits carrying over from one generation to the next. The most recent available data show that families received $68.1 billion in EITC—an average of $2,362 per household. More than half of EITC benefits go to taxpayers making less than $20,000, with the largest share going to those making $10,000 to less than $20,000.
Who is eligible for the EITC? It depends…
Each year, millions of workers with low to moderate income are eligible to claim the EITC and most eligible workers claim it. But it’s not quite as simple as that. IRS data show that the EITC has a consistently high overclaim error rate—an average of 29% of the EITC amount claimed by taxpayers from 2009–2011 was either too high or should not have been claimed at all. These overclaims are due in part to complicated eligibility rules
The rules are complex because they have to address complicated family relationships and residency arrangements to determine eligibility. It is often difficult to determine who can take the credit when children are involved, especially when filers share responsibility for the child with parents, former spouses, and other relatives or caretakers.
Here are some examples of how the rules can trip taxpayers up:
|The taxpayer is likely…||because…|
|A woman separated from her husband and moved out with custody of their children in January of last year.||eligible for the EITC||she can file using the head of household status.|
|A woman separated from her husband and moved out with custody of their children in November of last year.||not eligible for the EITC||she did not live apart from her husband for the last 6 months of the year and can’t claim head of household status.|
|An 18-year-old woman and her daughter moved home to her parents’ house in November of last year.||eligible for the EITC||she was supporting herself and her child before moving home.|
|An 18-year-old woman and her daughter always lived at her parents’ house.||not eligible for the EITC||she was a dependent of her parents for the full tax year.|
Preventing errors before they occur
As we mentioned above, the IRS is taking steps to educate taxpayers and tax preparers about the eligibility requirements to ease the burden of complying with these complex rules and to help prevent unintentional errors before they occur. The IRS also relies on pre-refund screening systems, correspondence audits, and document matching to detect, prevent, and correct errors.
However, there is more that the IRS and Congress can do to improve the design and administration of the EITC and other refundable tax credits. Check out our recommendations and read our full report to learn more.