EITC and CTC 101 and Recent Changes How the Earned Income Tax Credit and Child Tax Credit Make Work Pay for Millions of Families Washington RuFES Institute November 1 - 4, 2009 The Earned Income Tax Credit

What is the EITC?  Is it: A.A refundable federal tax credit for low income working families that financially rewards work? B.The largest anti-poverty program in America – far larger than Welfare (TANF)? C.A tremendously underutilized rural community development opportunity? D.All of the above?

How did it get started?  Initially proposed and passed under President Ford  Gained broad bipartisan support because it makes work pay  Renewed or expanded with broad bipartisan support in every subsequent administration

How does it work?  Available to families with or without children  Tops out at $5,657 for a 2-parent / 3-child family earning from $12,000–18,000 per year  Phases out at $48,279 for a 2-parent family  Refundable – even if a family owes no taxes  A family can go back and collect it for three years by filing amended returns  Advance payments possible in paychecks – but not often used

New Features for 2009  Awards factor in up to 3 children for ’09 & ‘10  Maximum investment income now $3,100  Tightened definition of qualifying child  Must be younger than the adult claiming the exemption  Can’t be claimed by non-parent earning less than parents  Must claim child as exemption to qualify  Tightened rules for non-custodial parents  Divorce decrees no longer enough  Non-custodial parent must submit Form 8332 or similar statement signed by custodial parent to claim exemption and credit

How big is it?  Nationally – in 2006  $43.7 billion  22.4 million workers  In Washington:  $620 million claimed in 2006  354,373 families received EITC

What difference does it make?  It lifts 5 million people out of poverty – half are children  It makes work more lucrative than welfare for millions of families  It helps low-wage full-time workers earn enough to meet basic needs  It pumps billions into economies of low-income communities – especially in rural areas

Why are we talking about it here?  At least one in four qualifying families fails to claim the EITC – many of them rural  These families leave billions in EITC unclaimed  This hurts not only the families, but the communities they live in  The additional income from EITC can reduce dependence on other programs

Why do some miss out?  They do not apply!  They don’t file taxes.  They don’t know about EITC or CTC.  They fear they will owe taxes.  They have a language barrier.  They may know but (incorrectly) fear losing eligibility for other benefits.

How much are Washington families losing? Tax Year 2006 Percent of Eligible Families Receiving EITC Number of Eligible Families not Filing for EITC Average Value per Unclaimed EITC Return Value of EITC Going Unclaimed Per Year Potential Recoverable Past Claims (by filing back three years) Washington64.3%196,500$1,283$252,117,446$756,332,338 Estimated from IRS and Census data More than $750 million unclaimed!

What are the CTC and ACTC?  CTC = Child Tax Credit  A non refundable federal tax credit of up to $1,000 per qualifying child  Begins phasing out at $75,000 for single parents and $110,000 for couples  ACTC – Additional Child Tax Credit  A refundable tax credit for families owing too little in taxes to collect the full CTC  2008 Bailout Bill lowered minimum earned income to qualify to $8,500 (from $12,050)  Stimulus Package further lowered it to $3,000  Tens of thousands of additional families will qualify!

Why discuss the CTC and ACTC?  Families with children who neglect to file for the EITC usually miss these too!  If half these families are due the CTC/ ACTC and have just one child, then they are leaving another $99 million on the table in Washington!

How do these credits affect communities?  They pump millions into local economies  Two-thirds is spent locally  Each $1.00 generates an additional $1.58 in local economic activity  Each $37,000 in EITC generates one new job  That’s about 6,800 more jobs if Washington families collected all they are due!  In Washington, 30 new EITC filers = 1 new job! Source: The Brookings Institution

Other tax effects of the economic stimulus  $400 making work pay credit  Already being deducted from wages  Also available to self-employed  Beware multiple jobs, ITIN filers & youth!  Sales tax deduction for new vehicles  Deduct taxes on first $49,500 in vehicle cost  Vehicles purchased Feb. thru Dec  $8,000 first-time homebuyer credit (thru Nov. 2009)  First $2,400 in Unemployment not taxed in ’09

Even more tax effects of the economic stimulus  Hope Credit increased to $2,500 for ’09 & ’10  Tax credit to offset higher education expenses  Now available for four years vs. two previously  Now refundable up to $1,000 / 40%  Now includes computer hardware & software for enrolled students  Tax subsidy to employers to reduce laid-off workers COBRA premiums by 65% (9 month limit)  Go Green Energy Credits  Several new business and residential credits

One more new opportunity  All tax filers may now apply part or all of their refund to the purchase of savings bonds!  This is a great asset accumulation opportunity.  In earlier trials, low-income filers have been especially willing to buy bonds for their children.

…questions?