By: Dennis Walsh
Post 1 of 2
In my first income tax course as a student in the 1970s, I recall the Earned Income Tax Credit (EITC) as a fairly simple calculation—the formula for which could be readily memorized.
Enacted as part of the Tax Reduction Act of 1975, the EITC was originally intended to be a modest and temporary refundable tax credit for lower-income workers to offset the Social Security payroll tax and rising food and energy prices prevalent in this inflationary period.
Expanded four times in the decades since, the EITC has become the third largest social welfare program in the US. According to the IRS, for 2013 almost 28 million workers and families received $66 billion in EITC payments, with an average payment amount of $2,400.
The amount of credit varies depending on income, family size, and filing status. Those who earned less than $52,427 in 2014 and met other eligibility requirements received up to $496 in EITC if they had no children. A maximum credit of up to $6,143 is available to those with three or more qualifying children.
There is no limit to the number of years that one can claim the credit, nor is there a lifetime cap on cumulative benefits. Neither is there a requirement that the claimant provide the support for a qualifying child. The child need only share the same residence with the claimant for more than 6 months of the year. And a child who is self-supporting and not qualified to be claimed as a dependent on the claimant’s tax return can be a qualifying “child” for EITC purposes.
Not surprisingly, a program of this size and nature has invited significant abuse over the years. Although many EITC overpayments result from unintentional mistakes by claimants, the IRS has estimated that between 21–25% of credit payments, more than $13 billion annually, are made improperly.
Some claimants know the income range where their maximum benefit plateaus and the point at which their available credit will begin to decrease. It is not unheard of for individuals to work under the table once their reported income reaches this level. Other schemes have involved preparation of false Form W-2, and some of these cases have included tax practitioner complicity.
An offshoot of the expansion of the EITC was the proliferation of so called “rapid refund” services which emerged with the advent of electronic filing. This is a misleading phrase since use of such a service has no affect on IRS processing time; these are financing arrangements with a commercial entity.
The refund anticipation loan (RAL) and more recent refund anticipation check (RAC), along with other variations of immediate payment plans, have been controversial and criticized by the media and consumer watchdog groups. Fees associated with these services have been viewed as tantamount to payday lending practices, primarily exploiting working poor EITC recipients.
On the positive side, some studies have found that the EITC has significantly increased workforce participation among single mothers. My wife and I mentor a single parent family receiving the EITC, and we can attest that along with the nonrefundable and refundable additional child tax credits, these annual payments are eagerly anticipated and depended upon to help fill the gap.
But these and other government subsidies have done nothing to lead the family out of financial distress. Rather, they have fostered ongoing dependency along with a fear of losing benefits as a result of higher earnings.
In the second part of this post I’ll suggest some potential remedies.
Through The Micah Project, Dennis Walsh, CPA, serves as a volunteer consultant to religious workers and exempt organizations, focusing on financial management, legal compliance, and organizational development. A graduate of the University of Wisconsin, he completed the Duke University certificate program in nonprofit management. Dennis is the author of “Legal & Tax Issues for North Carolina Nonprofits” and has written for various nonprofit publications. He actively volunteers with the Guilford Nonprofit Consortium, the Not-for-Profit Committee of NCACPA, and for the accounting assistance program of the North Carolina Center for Nonprofits. He can be reached at [email protected].