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 get little or no benefit from these credits. Further improvements could significantly reduce poverty and help other hard-pressed families.
The Child Tax Credit is worth up to $1,000 per child under age 17. But, ironically, millions of children receive no benefit from this credit because their families are too poor to qualify. Although the credit is available as a refund to some families with little or no federal income tax liability, in 2007, a family must earn at least $11,750 to qualify for the refundable credit. As a result, nearly 11 million children are denied any help from the Child Tax Credit. Another 11 million children get only a partial credit, because a family with one child must earn $18,417 in 2007 to benefit from the full credit (a family with two or more children needs higher earnings to get the full benefit). Every year, the minimum required earnings are adjusted upward, excluding an increasing number of parents whose wages don't keep up with inflation.
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 2007 to married couples earning less than $39,783 or singles earning less than $37,783, and provides a maximum benefit of just over $4,700 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 $428 in 2007 — for very low-income working adults aged 25 to 64 without eligible children. In 2007, single adults with incomes below $12,120, or married couples with incomes below $14,120, 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 only covers 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 over three million Americans out of poverty, two-thirds of them children, and would increase the incomes of millions more. If Congress lowers the minimum earnings requirement without eliminating it, and keeps the threshold from rising with inflation, the number of poor children helped would be less, but could still range in the millions.
Significantly 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 portion of expenses that families are allowed to claim and indexing the thresholds and expense limits would further expand the credit.
Where things stand on the Hill
On October 25, Ways and Means Committee Chairman Rangel (D-NY) introduced a broad tax reform bill (H.R. 3970). In addition to permanently repealing the alternative minimum tax, the bill would expand eligibility for the refundable Child Tax Credit and improves the Earned Income Tax Credit for workers without eligible children. The $1.3 trillion 10-year cost of this ambitious tax package is fully paid for, as tax cuts are offset by revenue raisers elsewhere in the tax system in a way that makes the system more progressive. Most likely, the bill will not be acted upon by Congress this year. However, the bill lays out an ambitious agenda for the future.
On November 9th, the House passed a bill (H.R. 3996) to temporarily patch the alternative minimum tax. The AMT patch bill includes some of the provisions proposed in Rangel's broad tax reform bill, including a temporary expansion of eligibility for the refundable child tax credit. Under current law, a family must earn at least $12,050 in 2008 to qualify for the refundable child tax credit; H.R. 3996 would reduce the threshold to $8,500. The bill is fully paid for by closing tax loopholes, including the special tax treatment of private equity fund managers. The bill now heads to the Senate for consideration. President Bush has threatened to veto this important piece of legislation.
Information & resources:
House AMT "Patch" Bill is Fiscally Responsible, Also Includes Child Tax Credit and Carried Interest Provisions That Would Make the Tax Code More Fair, Center on Budget and Policy Priorities (November 7, 2007)
Congressman Rangel's Tax Bill Would Make the Tax Code Simpler & Fairer - and the Changes Are All Paid For, Citizens for Tax Justice (November 2, 2007)
Improving the Refundable Child Tax Credit: An Important Step toward Reducing Child Poverty, Center on Budget and Policy Priorities (October 30, 2007)
Distributional Effects of the Major Individual Income Tax Provisions of H.R. 3970, The Tax Reduction and Reform Act of 2007, Tax Policy Center (October 26, 2007)
Ways and Means Committee Chairman Charles Rangel's Proposed Expansion of the EITC for Childless Workers: An Important Step to Make Work Pay, Center on Budget and Policy Priorities (October 25, 2007)
Eligibility for Child Tax Credit by Age of Child, Tax Policy Center (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).