What Is the Earned Income Credit (EIC)?
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What is the Earned Income Credit (EIC)?
The Earned Income Credit (EIC), also known as the Earned Income Tax Credit (EITC), is a federal program that provides a credit or a cash supplement to low and moderate-income workers who qualify. For those who are eligible, the EIC will do one of two things. Either it will lower the amount of tax owed to the federal government for the prior year or it will result in receiving a check (‘refund") from the government. If you qualify, you will either owe less in taxes or you may get cash back from the government.
The EIC was created by the U.S. Congress and is supported by federal taxpayer dollars. The program is administered through the Internal Revenue Service (IRS) of the federal government.
Why was the Earned Income Credit created?
The EIC was originally created in 1975 by Congress to help compensate for the burden of Social Security payroll tax on low income workers and to create added incentives to work for persons who earn low wages. Payroll taxes, currently 15.3% (split 50/50 between employee and employer), are assessed on the earnings (up to $87,000) of all workers, which results in low-income workers paying a higher share of their income on such taxes compared to high income earners. The EIC acts as work incentive by enabling those who are eligible to keep more of their paycheck so as to have extra money to spend.
The EIC program was expanded in 1986, 1990, and 1993. Especially in the past decade, as a result of increased funding during President Clinton’s administration, the EIC has become a very important federal program in reducing poverty and creating more incentives (motivation) for people to work. After Medicaid, it is the federal government's second largest program that assists persons with low income. In terms of funding, the federal EIC program is almost as large as the food stamps and TANF programs combined. The EIC lifts more working families above the poverty line than any other federal program. In 2001, the EIC provided approximately $31 billion of tax credits or cash supplements to close to 19 million working families and individuals. In 1999, the EIC provided enough funds to lift the incomes of 4.8 million people (including 2.6 million children) above the income poverty line. About 98% of EIC claim amounts go to assist workers with one or more qualifying children, with the remainder going to workers with no qualifying children.
The EIC is a significant means by which the federal government redistributes income so that persons earning low wages receive additional income to provide them with a more "livable wage" so as to help cover needed household expenses and to pay job-related costs such childcare and transportation. In so doing, the EIC makes work more financially rewarding for individuals who earn low wages.
The EIC is indexed to inflation which means that the value of the credit is not eroded over time due to inflation.
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