Working Family Tax Credits
- What is the Child Tax Credit?
- What is the Earned Income Tax Credit?
- What is the Child and Dependent Care Tax Credit?
- Ways to improve tax credits for working familes
- Where things stand on the Hill
- Information & resources
The Child Tax Credit, Earned Income Tax Credit, and Child and Dependent Care Credit provide valuable tax benefits for working families. Some improvements to these credits were included in the tax cuts enacted since 2001, but many of the poorest families and workers still receive little or no benefit.
In the midst of the country’s economic problems, there is some good news for struggling families. Congress enacted an expansion of the refundable Child Tax Credit as part of the Emergency Economic Stability Act (H.R. 1424). The change will benefit 13 million children in low-income families by lowering the refund eligibility threshold from $12,050 to $8,500 for 2008.
The Child Tax Credit is worth up to $1,000 per child under age 17, with no limit on the number of children. Ironically, however, millions of children receive no benefit from this credit because their families are too poor to qualify. The credit is partially refundable – if a family does not owe enough taxes to use all of its Child Tax Credit, it may be eligible for a refund. The refund is calculated as a percentage (15%) of income over a threshold amount. Families earning less than the threshold are ineligible for the refundable component of the credit; millions of other low-income families receive only a small credit. The threshold is indexed for inflation, so that each year an increasing number of families whose wages don’t keep up with inflation are excluded from the tax benefit.
The new law lowers the eligibility threshold from $12,050 to $8,500 for 2008. Families of 2.9 million children whose parents earn between $8,500 and $12,050 will be newly eligible for the credit, and the families of 10.1 million children will receive a higher credit than they otherwise would have. For example, a single mother earning the minimum wage, working 40 hours a week for 50 weeks a year will earn $12,260 in 2008. Under the $12,050 threshold, she would have received a credit of just $32. Now, this single mother will receive a credit of over $500.
But this provision is effective for 2008 only. Every year, the minimum required earnings are adjusted upward, which disqualifies an increasing number of parents whose wages don't keep up with inflation. Advocates must continue to work to permanently lower the earnings requirement, keep it from increasing because of inflation, and eventually make the credit fully refundable.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) boosts the wages of eligible tax filers with modest incomes and lifts millions of children out of poverty. Tax filers can use the credit to offset their federal tax liability or receive it as a refund, if they owe little or no federal income tax. The EITC is available in 2008 to married couples earning less than $41,646 or singles earning less than $38,646, and provides a maximum benefit of $4,824 for families with two or more children. The EITC lifts more children out of poverty than any other federal program. However, because the credit is not increased for families with more than two children, it provides relatively less help in helping large families escape poverty.
The EITC also provides a small benefit — up to $438 in 2008 — for very low-income working adults aged 25 to 64 without eligible children. In 2008, single adults with incomes below $12,880, or married couples with incomes below $15,880, are eligible. The Earned Income Tax Credit rate for workers without children has not been increased since its inception in 1993.
What is the Child and Dependent Care Tax Credit?
The Child and Dependent Care Tax Credit is designed to offset some of the expenses that parents pay for child care or dependent care in order to work. Families can claim a percentage of their care expenses, up to $3,000 for one child or dependent and $6,000 for two or more children or dependents. The percentage drops as family income increases, from 35 percent for families with incomes up to $15,000, to 20 percent for families with incomes above $43,000. The maximum value of the credit is $2,100. However, this credit can only be used to offset federal income tax liability; it is not available as a refund. As a result, many low-income families who have little or no federal income tax liability but struggle to pay for child care receive no benefit. In addition, the credit covers only a fraction of expenses, even for low-income families, and is not adjusted for inflation.
Ways to Improve Tax Credits for Working Families
There are several ways Congress could improve the Child Tax Credit, Earned Income Tax Credit, and Child and Dependent Care Credit.
Eliminating the earnings requirement for the refundable Child Tax Credit would lift millions of Americans out of poverty and would increase the incomes of millions more. If Congress keeps the threshold at $8,500 in future years and stops increasing it with inflation, the number of women and children helped would be less, but still significant.
Increasing the amount of the EITC for low-income adults without eligible children and expanding the numbers of workers who qualify for it would help millions of low-wage workers escape poverty, offset the significant payroll taxes they pay, and provide additional work incentives. The EITC for families with children could be improved by increasing assistance for families with three or more children and further reducing marriage penalties.
Making the Child and Dependent Care Credit fully refundable, so that families with employment-related care expenses could claim the credit without regard to their federal income tax liability, would provide child care assistance to an additional 1.6 million families, the large majority with incomes below $30,000. Increasing the percentage of expenses that low- and moderate-income families are allowed to claim and indexing the thresholds and expense limits would further expand the credit.
Where things stand on the Hill
As part of the recent Emergency Economic Stability Act (H.R. 1424), Congress increased tax benefits for 13 million children in low-income working families by lowering the Child Tax Credit’s family earnings threshold from $12,050 to $8,500. Over 1,100 organizations from every state deserve credit for participating in the effort by signing on to a letter urging Congress to support this step toward reducing child poverty. The bill passed the Senate on October 1, 74-25, and the House on October 3, 263-171, and was signed into law on October 4 (Public Law No: 110-343).
But this provision is effective for 2008 only. Every year, the minimum required earnings are adjusted upward, which disqualifies an increasing number of parents whose wages don't keep up with inflation. Advocates must continue to work towards permanent change that makes the Child Tax Credit fully refundable for low-income, hardworking families.
Several other bills to improve various tax credits for low-income families have been introduced in this Congress, but are not expected to move this year. Two, introduced by members of the tax-writing committees, are highlighted below.
An increase in the EITC for workers without qualifying children was included in the broad tax relief bill, HR 3970, introduced by House Ways and Means Chairman Charles Rangel in October 2007.
A bill to improve the federal Child and Dependent Care Credit for millions of families (S. 3079) was introduced on June 4, 2008 by Senators Gordon Smith (R-OR) and Blanche Lincoln (D-AR), members of the Senate Finance Committee. The bill would increase and make refundable the tax credit for employment-related dependent care expenses. The bill also makes permanent the expanded tax credit for adoption expenses.
Information & resources:
Child Tax Credit Expansion Passed By Congress Will Help 13 Million Children, Center on Budget and Policy Priorities (October 3, 2008)
13 Million Children Would Benefit From Child Credit Expansion in Tax “Extenders” Bill, Center on Budget and Policy Priorities (July 29, 2008).
“Tax Extenders” Bill the Latest Test of Congress’s Commitment to Fiscal Discipline, Center on Budget and Policy Priorities (June 10, 2008).
The Expanded Child and Dependent Care Tax Credit in the Family Tax Relief Act of 2008 Would Help Make Child Care More Affordable for Millions of Families, National Women’s Law Center (June 2008).
Improving the Refundable Child Tax Credit: An Important Step Toward Reducing Child Poverty, Center on Budget and Policy Priorities (May 19, 2008).
Tax Topics: Working Families, Tax Policy Center.
Eligibility for Child Tax Credit by Age of Child, Tax Policy Center (May 22, 2007).
Reforming the Child and Dependent Care Tax Credit, Tax Policy Center (June 11, 2007)
Tax Reform and Poverty, Center on Budget and Policy Priorities (April 10, 2006).