The Earned Income Tax Credit

The Earned Income Tax Credit (EIC) is a federal tax benefit for low-income and moderate-income individuals who work full-time, part-time, or part of the year. The EIC is designed primarily to benefit families. Workers who qualify for the EIC and file a federal tax return can get back some or all of the federal income tax that was taken out of their pay during the year. They may also get additional cash back as an income supplement. For example, in tax year 2008, a working family raising more than one child at home and having a family income of less than $38,646 (or less than $41,646 for married workers) may get an Earned Income Credit of up to $6,030 (combined value of federal and state EIC). The largest credit amounts go to families with two or more children and household income between about $12,000 and $15,750.

The EIC was enacted in 1975, and expanded in 1986, 1990, and 1993. It has had strong support from Presidents Reagan, Bush Sr., and Clinton. Its purposes are:

• to reduce the tax burden on low and moderate income workers;
• to supplement wages of these workers; and
• to make work more attractive than welfare.

In addition to the Federal EIC, Maryland has a state EIC. The maximum value of an individual taxpayer’s state EIC is half the amount of that taxpayer’s Federal EIC. This amount can be used to reduce or eliminate state income tax liability. If the amount of the Maryland credit exceeds the worker’s state tax liability, then the taxpayer may be eligible to receive a portion of his/her Maryland EIC as a refund payment. Taxpayers may qualify for this benefit even if they do not otherwise have to file a state tax return.

For tax year 2006, over 23 million workers in the U.S. claimed more than $44.6 billion in federal Earned Income Credit. In Maryland:

• 353,488 Maryland families/workers claimed the Federal EIC for a total amount of $642,568,000 (Tax Year 2006).
• 346,407 Maryland families/workers claimed the state EIC for a total of $171,455,403 (Tax Year 2006). (This tally combines both components of the Maryland EIC, the refundable and the non-refundable state EIC).

EIC eligibility is not limited by household composition or citizenship. Many types of households, e.g. households with single parents and foster parents, are eligible for the EIC, provided they meet specified co-residency requirements. Even households with no children can get a small credit if their earnings are very low. Many legal immigrants can qualify for the EIC, provided they meet the eligibility requirements.

With the implementation of welfare reform measures, many new workers have entered low-wage labor markets. These workers need benefits such as the EIC in order to make low-wage employment a viable alternative to welfare.

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