EITC and CTC 101 EITC and CTC 101 and Recent Changesand Recent Changes

How the How the Earned Income Tax CreditEarned Income Tax Credit and and Child Tax CreditChild Tax Credit Make Make

Work Pay for Work Pay for Millions of FamiliesMillions of Families

Washington RuFES InstituteWashington RuFES InstituteNovember 1 - 4, 2009November 1 - 4, 2009

The Earned Income Tax CreditThe Earned Income Tax Credit

What is the EITC?What is the EITC? Is it:Is it:

A.A. A refundable federal tax credit for low A refundable federal tax credit for low income working families that financially income working families that financially rewards work?rewards work?

B.B. The largest anti-poverty program in The largest anti-poverty program in America – far larger than Welfare America – far larger than Welfare (TANF)?(TANF)?

C.C. A tremendously underutilized rural A tremendously underutilized rural community development opportunity?community development opportunity?

D.D. All of the above?All of the above?

How did it get started?How did it get started?

Initially proposed and passed under Initially proposed and passed under President FordPresident Ford

Gained broad bipartisan support Gained broad bipartisan support because it makes because it makes workwork pay pay

Renewed or expanded with broad Renewed or expanded with broad bipartisan support in every bipartisan support in every subsequent administrationsubsequent administration

How does it work?How does it work? Available to families with or without children Available to families with or without children

Tops out at $5,657 for a 2-parent / 3-child Tops out at $5,657 for a 2-parent / 3-child family earning from $12,000–18,000 per year family earning from $12,000–18,000 per year

Phases out at $48,279 for a 2-parent familyPhases out at $48,279 for a 2-parent family

Refundable – even if a family owes no taxesRefundable – even if a family owes no taxes

A family can go back and collect it for three A family can go back and collect it for three years by filing amended returns years by filing amended returns

Advance payments possible in paychecks – Advance payments possible in paychecks – but not often usedbut not often used

New Features for 2009New Features for 2009 Awards factor in up to 3 children for ’09 & ‘10Awards factor in up to 3 children for ’09 & ‘10

Maximum investment income now $3,100Maximum investment income now $3,100

Tightened definition of qualifying childTightened definition of qualifying child Must be younger than the adult claiming the exemptionMust be younger than the adult claiming the exemption

Can’t be claimed by non-parent earning less than parentsCan’t be claimed by non-parent earning less than parents

Must claim child as exemption to qualifyMust claim child as exemption to qualify

Tightened rules for non-custodial parentsTightened rules for non-custodial parents Divorce decrees no longer enoughDivorce decrees no longer enough

Non-custodial parent must submit Form 8332 or similar Non-custodial parent must submit Form 8332 or similar statement signed by custodial parent to claim exemption statement signed by custodial parent to claim exemption and creditand credit

How big is it?How big is it?

Nationally – in 2006Nationally – in 2006 $43.7 billion$43.7 billion 22.4 million workers22.4 million workers

In In WashingtonWashington: : $620 million$620 million claimed in 2006 claimed in 2006 354,373 families 354,373 families received EITCreceived EITC

What difference does it What difference does it make?make?

It lifts It lifts 5 million people5 million people out of poverty – half out of poverty – half are childrenare children

It It makes work more lucrative than welfaremakes work more lucrative than welfare for millions of familiesfor millions of families

It helps low-wage full-time workers earn It helps low-wage full-time workers earn enough to enough to meet basic needsmeet basic needs

It It pumps billions into economiespumps billions into economies of of low-income communities – especially in low-income communities – especially in rural areasrural areas

Why are we talking about it Why are we talking about it here?here?

At least one in four qualifying families fails At least one in four qualifying families fails to claim the EITC – many of them to claim the EITC – many of them ruralrural

These families leave billions in EITC These families leave billions in EITC unclaimedunclaimed

This hurts not only the families, but the This hurts not only the families, but the communities they live incommunities they live in

The additional income from EITC can The additional income from EITC can reduce dependence on other programsreduce dependence on other programs

Why do some miss out?Why do some miss out?

They do not apply!They do not apply!

They don’t file taxes.They don’t file taxes.

They don’t know about EITC or CTC.They don’t know about EITC or CTC.

They fear they will owe taxes.They fear they will owe taxes.

They have a language barrier.They have a language barrier.

They may know but (incorrectly) fear They may know but (incorrectly) fear losing eligibility for other benefits.losing eligibility for other benefits.

How much are How much are WashingtonWashington families losing? 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)

Washington 64.3% 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 What are the CTC and ACTC?ACTC?

CTC = Child Tax CreditCTC = Child Tax Credit A non refundable federal tax credit of up to $1,000 per A non refundable federal tax credit of up to $1,000 per

qualifying childqualifying child

Begins phasing out at $75,000 for single parents and Begins phasing out at $75,000 for single parents and $110,000 for couples$110,000 for couples

ACTC – Additional Child Tax CreditACTC – Additional Child Tax Credit A refundable tax credit for families owing too little in taxes A refundable tax credit for families owing too little in taxes

to collect the full CTCto collect the full CTC

2008 Bailout Bill lowered minimum earned income to 2008 Bailout Bill lowered minimum earned income to qualify to $8,500 (from $12,050)qualify to $8,500 (from $12,050)

Stimulus Package further lowered it to $3,000Stimulus Package further lowered it to $3,000

Tens of thousands of additional families will qualify!Tens of thousands of additional families will qualify!

Why discuss the CTC and Why discuss the CTC and ACTC?ACTC?

Families with children who neglect to Families with children who neglect to file for the EITC usually miss these too! file for the EITC usually miss these too!

If half these families are due the CTC/ If half these families are due the CTC/ ACTC and have ACTC and have just one child,just one child, then then they are leaving another they are leaving another $99 million$99 million on the table in Washington!on the table in Washington!

How do these credits How do these credits affect communities?affect communities?

They pump millions into local economiesThey pump millions into local economies

Two-thirds is spent locallyTwo-thirds is spent locally

Each $1.00 generates an additional $1.58 in Each $1.00 generates an additional $1.58 in locallocal economic activity economic activity

Each $37,000 in EITC generates one new jobEach $37,000 in EITC generates one new job That’s about That’s about 6,800 more jobs6,800 more jobs if Washington if Washington

families collected all they are due!families collected all they are due! In Washington, In Washington, 30 new EITC filers = 1 new job!30 new EITC filers = 1 new job!

Source: The Brookings Institution

Other tax effects of the economic Other tax effects of the economic stimulusstimulus

$400 making work pay credit$400 making work pay credit Already being deducted from wagesAlready being deducted from wages Also available to self-employedAlso available to self-employed Beware multiple jobs, ITIN filers & youth!Beware multiple jobs, ITIN filers & youth!

Sales tax deduction for new vehicles Sales tax deduction for new vehicles Deduct taxes on first $49,500 in vehicle cost Deduct taxes on first $49,500 in vehicle cost Vehicles purchased Feb. thru Dec. 2009Vehicles purchased Feb. thru Dec. 2009

$8,000 first-time homebuyer credit $8,000 first-time homebuyer credit (thru Nov. 2009)(thru Nov. 2009)

First $2,400 in Unemployment not taxed in ’09First $2,400 in Unemployment not taxed in ’09

Even more tax effects of the Even more tax effects of the economic stimuluseconomic stimulus

Hope Credit increased to $2,500 for ’09 & ’10Hope Credit increased to $2,500 for ’09 & ’10 Tax credit to offset higher education expenses Tax credit to offset higher education expenses Now available for four years vs. two previouslyNow available for four years vs. two previously Now refundable up to $1,000 / 40%Now refundable up to $1,000 / 40% Now includes computer hardware & software for Now includes computer hardware & software for

enrolled studentsenrolled students

Tax subsidy to employers to reduce laid-off Tax subsidy to employers to reduce laid-off workers COBRA premiums by 65% workers COBRA premiums by 65% (9 month limit)(9 month limit)

Go Green Energy CreditsGo Green Energy Credits Several new business and residential creditsSeveral new business and residential credits

One more new One more new opportunityopportunity

All tax filers may now apply part or all of All tax filers may now apply part or all of their refund to the purchase of savings their refund to the purchase of savings bonds!bonds!

This is a great asset accumulation This is a great asset accumulation opportunity.opportunity.

In earlier trials, low-income filers have been In earlier trials, low-income filers have been especially willing to buy bonds for their especially willing to buy bonds for their children.children.

……questions?questions?