Earned income tax credit

Based on Wikipedia: Earned income tax credit

Here's a peculiar fact about American anti-poverty policy: one of the most effective programs for helping low-income families isn't a welfare check, a food stamp, or public housing. It's a line on your tax return.

The Earned Income Tax Credit, or EITC, has become one of the largest anti-poverty tools in the United States, yet most income measures—including the official poverty rate—don't even account for it. This tax credit does something unusual in the landscape of social programs: it rewards work. The more you earn (up to a point), the bigger your credit grows. It's essentially a way of making low-wage work pay better, without touching the minimum wage.

The Basic Mechanics

The EITC is a refundable tax credit, which means something important: if the credit exceeds what you owe in taxes, you get the difference as a refund. This isn't just a reduction in your tax bill—it's actual money coming back to you.

The amount depends on two main factors: how much you earn and how many children you have. Low-income adults without children can qualify, but the credit is substantially larger for families. As of the program's current form, there are different tiers: one for families with no children, one for families with one child, one for families with two children, and a third tier added in 2009 for families with three or more children.

The credit follows a distinctive curve. It "phases in" as you earn more—meaning your credit grows with each additional dollar of earned income. Then it hits a plateau where the credit stays constant. Finally, it "phases out" as your income continues to rise, gradually shrinking until it disappears entirely.

What Counts as Earned Income?

The Internal Revenue Service has a specific definition here. Earned income means money you get through personal effort: wages, salaries, tips, commissions, and other taxable employee pay. If you're self-employed, your net earnings count. There are some edge cases too—disability payments from a private employer's plan (if you're under minimum retirement age of sixty-two), or nontaxable combat pay for military members who choose to include it.

What doesn't count is equally important. Investment income doesn't qualify. Neither does rental income, since that's considered passive. Alimony, pensions, Social Security, workers' compensation—none of these count as earned income for EITC purposes.

This distinction matters because it reveals the program's philosophy: rewarding active work, not passive income or government benefits.

The Political Origins

The story begins in 1969, when President Richard Nixon proposed something called the Family Assistance Plan. This included a guaranteed minimum income structured as a "negative income tax"—if your income fell below a certain threshold, instead of paying taxes, you'd receive money from the government. The House of Representatives passed it. The Senate killed it.

Three years later, during his 1972 presidential campaign, George McGovern proposed giving every American a demogrant of one thousand dollars. Critics howled. The very idea of giving people money without requiring work carried a stigma. One Hawaii state senator, defending the state's residency requirements for public assistance, argued they were necessary to discourage "parasites in paradise."

The political climate was hostile to anything that looked like paying people not to work.

But Senator Russell Long saw a different approach. What if you structured aid to reward work instead? President Gerald Ford signed Long's proposal into law as part of the Tax Reduction Act of 1975. This was the birth of the EITC.

The initial version was modest. It gave a tax credit to individuals who had at least one dependent, maintained a household, and earned less than eight thousand dollars during the year. The maximum credit was four hundred dollars for those earning under four thousand dollars, with a smaller credit for those earning between four thousand and eight thousand.

How It Grew

What's remarkable about the EITC's expansion is its bipartisan durability. The program has been enlarged under both Democratic and Republican administrations, regardless of whether the broader tax legislation was raising or lowering taxes overall.

The widely publicized Tax Reform Act of 1986 expanded it. Further expansions came in 1990, 1993, 2001, and 2009. In 1993, President Bill Clinton tripled the EITC, making it a centerpiece of his approach to welfare reform—the idea being that if you "make work pay," you reduce the need for traditional welfare.

The 2009 expansion, part of the American Recovery and Reinvestment Act, created that third tier for families with three or more children. Instead of phasing in at forty percent of income, these larger families saw their credit phase in at forty-five percent, effectively increasing their maximum credit by almost six hundred dollars. The expansion also provided marriage penalty relief by raising the income threshold at which the credit begins to phase out for married couples.

This marriage penalty issue is worth understanding. In the original structure, two single people each receiving the EITC might lose a significant portion of their combined credits if they married and filed jointly. The reform didn't eliminate this penalty entirely, but it reduced it by giving married couples a longer plateau before the phase-out begins.

The Economics Profession Weighs In

In 2011, the American Economic Association surveyed 568 of its members about the EITC. Roughly sixty percent agreed (31.7% outright, 30.8% with provisos) that the program should be expanded.

When they repeated the survey in 2021, support had surged to ninety percent.

This is notable because economists famously disagree about nearly everything. The EITC has become one of the rare policy interventions commanding near-consensus support among people who study these questions for a living.

Why? Because it threads a difficult needle. It provides substantial help to low-income families while maintaining work incentives. The alternative often debated is raising the minimum wage, which economists worry might reduce employment. The EITC avoids this by subsidizing low-wage work rather than mandating higher wages.

State and Local Versions

As of 2025, thirty-one states plus the District of Columbia have enacted their own EITCs, piggybacking on the federal program. California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington, and Wisconsin all have state-level versions.

Some of these are refundable, meaning they work like the federal version—you can get money back beyond what you owe in state taxes. Others are non-refundable, only reducing your state tax liability to zero.

A few localities have gone even further. San Francisco, New York City, and Montgomery County in Maryland have enacted small local EITCs. These are rare, since most cities and counties don't have the administrative capacity to run income tax systems sophisticated enough to calculate such credits.

Who Qualifies as a Child?

The rules here get intricate, because families come in many configurations. A qualifying child can be your daughter, son, stepchild, or any further descendant—grandchild, great-grandchild, and so on. It can also be your sibling, half-sibling, step-sibling, or any of their descendants: nieces, nephews, great-nephews, great-nieces.

Foster children count if they've been officially placed by an authorized agency or are members of your extended family. Children in the process of being adopted count, provided they've been lawfully placed.

There are three main tests: relationship, age, and residence.

The relationship test is what we just covered. The age test has some nuance. Generally, the qualifying child must be under nineteen at the end of the tax year. But if they're a full-time student, this extends to under twenty-four. And if they're classified as permanently and totally disabled, there's no age limit at all.

The permanence-and-total-disability classification requires a physician to state the condition has lasted or will last at least a year, or could lead to death. The person must have a mental or physical disability preventing substantial gainful activity.

The full-time student definition is worth noting. You're considered full-time if you're enrolled for the number of hours or courses the school considers full-time attendance. This includes high school students in co-op jobs or vocational programs. Schools include technical, trade, and mechanical schools, not just traditional colleges.

The Residency Requirement

You must live with your qualifying child for more than half the tax year—specifically, six months and one day—within the fifty states or the District of Columbia. Temporary absences count as time living together, whether it's you or the child who's temporarily away for things like school, medical care, or military service.

Military personnel stationed outside the United States on extended active duty (indefinite period or more than ninety days) are considered to live in the United States for EITC purposes.

Complex Family Situations

What happens when a child could qualify for more than one adult? Say both a parent and a grandparent meet the initial relationship, age, and residency requirements.

The tiebreaker rules are precise. If a parent lived with the child for at least six months and one day, the parent can always choose to claim the child for EITC purposes. The parent can also choose to waive this right to a non-parent family member, but only if that non-parent has a higher adjusted gross income than any parent who lived with the child for at least six months.

Between two unmarried parents, the tiebreak goes to whoever lived with the child longer. Between two non-parents, it goes to whoever has the higher adjusted gross income. Between a parent and a non-parent, the parent wins automatically.

There's an interesting wrinkle for young single parents. If you're a single parent under nineteen living in an extended family situation, you might yourself be claimable as the qualifying child of an older relative. If so, you cannot claim the EITC. The same applies if you're under twenty-four and a full-time student. But this rule doesn't apply to married couples claiming EITC with a child, even if one or both spouses are under nineteen.

The logic here prevents double-dipping: you can't be claimed as someone else's dependent child while simultaneously claiming your own child for EITC purposes.

How the Credit Actually Works

Let's walk through the math conceptually. Imagine you're a single parent with two children, earning very little. As you earn your first dollars, the EITC phases in at a certain percentage. For two children, this rate is forty percent. So for every dollar you earn, you get an additional forty cents from the EITC.

Your total effective income is actually 1.40 dollars for every dollar you earn—your wage plus the credit.

This phase-in continues until you hit a certain income level, at which point you've reached the maximum credit. Now you're on the plateau. Whether you earn a little more or a little less, your credit stays constant.

Eventually, as your income continues rising, you hit the phase-out threshold. Now the credit shrinks. For someone with more than one qualifying child, it phases out at twenty-one percent. For one child, sixteen percent.

This means something important: considering the EITC alone, it's always advantageous to earn one more dollar of wages or salary. The phase-out rate is never so high that earning more reduces your net income.

But there's a dangerous cliff built into the system for investment income. If you have more than a certain amount of investment income (interest, dividends, capital gains), you lose the entire credit suddenly. One additional dollar of investment income can cost you thousands in lost EITC.

This creates a bizarre incentive structure for low-income people who might have modest savings or investments. Keep your investment income just below the threshold, or lose everything.

The Marriage Penalty and Other Quirks

Even after the 2009 reforms, a marriage penalty persists. Two single people, each earning modest incomes and claiming the EITC, will often receive a larger combined credit than they would as a married couple filing jointly.

Why? Because the phase-out range for married couples filing jointly isn't simply double the range for single filers. The reform gave married couples five thousand dollars of additional plateau, but that doesn't fully eliminate the penalty.

This has real effects. Some low-income couples choose not to marry, or to marry but file separately (which makes them ineligible for EITC), because the marriage penalty is substantial enough to affect their financial calculus.

Interaction with Other Programs

The EITC doesn't exist in isolation. Many recipients also qualify for Medicaid, Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), housing assistance, and other means-tested programs.

Each of these programs has its own phase-out range. As your income rises, you might lose SNAP benefits, face higher Medicaid premiums, lose housing subsidies, and see your EITC begin to phase out—all simultaneously.

In certain rare circumstances, depending on the state, the cumulative effect can create marginal tax rates approaching or even exceeding one hundred percent. That is, earning an additional dollar might cost you more than a dollar in lost benefits and increased taxes.

Conversely, during the EITC phase-in period, when some benefits haven't yet begun phasing out, your net income can rise faster than your wage increase. Earn an extra dollar, and with the forty or forty-five percent EITC phase-in rate, your spendable income might jump by 1.40 to 1.45 dollars.

This creates a highly complex landscape that's difficult for recipients to navigate. Small changes in work hours or wages can have outsized, non-linear effects on take-home resources.

The Paperwork

If you're claiming EITC with one or more qualifying children, you need to fill out Schedule EIC and attach it to your Form 1040. This form asks for each child's name, Social Security number, year of birth, whether an older child aged nineteen to twenty-three was a full-time student, whether any child is classified as disabled, the child's relationship to you, and the number of months the child lived with you in the United States.

That last question is where the six-months-and-one-day requirement gets reported. Per IRS instructions, this is listed as seven months on Schedule EIC.

The form is relatively simple compared to many tax schedules, but errors are common. Relationship requirements, age limits, residency tests—these details matter, and getting them wrong can delay your refund or trigger an audit.

Childless Adults

The EITC for adults without qualifying children is much smaller, but it exists. For the 2021 tax year, single adults could qualify with income under $21,430 (or $27,380 if married filing jointly).

This represents an acknowledgment that low-wage work deserves support even for those without dependents. But the credit amount is dramatically smaller than for families with children, reflecting the program's historical focus on helping parents.

What This Reveals About American Social Policy

The EITC's success and expansion tell us something about the American political landscape. Direct cash transfers remain politically fraught. The idea of giving people money for not working—what Nixon's Family Assistance Plan was accused of—still carries enough stigma to be difficult to enact.

But subsidizing work through the tax code? That's been palatable to both parties for fifty years.

The program embodies a particular American approach to poverty: not guaranteed income, not direct redistribution, but making the market work better for those at the bottom. It says, implicitly, that work should pay. That if you're willing to show up and do a job, even a low-wage one, society will supplement your earnings to ensure you can support yourself and your family.

Whether this is the best approach is a question economists and policymakers continue to debate. The 2021 survey showing ninety percent of economists supporting EITC expansion doesn't mean they all think it's perfect—many favor it as a pragmatic solution within political constraints that rule out more generous alternatives.

But for now, this complex, phase-in-plateau-phase-out tax credit remains one of the primary ways the United States tries to ensure that working—even at low wages—provides a path out of poverty.