Editor’s note: This post was authored by Lauren Pescatore, Debbie Stein and Amy Greene of TaxCreditsForWorkingFamilies.org, a website dedicated to educating and informing advocates and public officials about the importance of the state and federal tax credits to working families. Their site includes a 50 State Resource Map that serves as a quick reference guide as to the status of tax credits across the country.
Because so many low- and middle-income families live paycheck to paycheck, tax refunds are prime opportunities—sometimes the only opportunity—for families to save. Refundable tax credits such as the Earned Income Tax Credit (EITC) and the Child Tax Credit not only offset some or all of these working families’ federal income taxes; they often provide additional income to help offset other types of taxes. Because they are refundable, if the size of a family’s credit exceeds the amount of income tax it owes, the family receives the difference in the form of a refund check. The Child and Dependent Care Credit, although not currently refundable, can also provide significant tax savings for working parents with child care expenses. These credits provide many working families with a lump sum refund that they can save or invest.
The EITC is administered through the personal income tax, and is based solely on earned income, meaning families must be working to be eligible. In 2011, the federal EITC lifted 5.7 million people, including 3.1 million children, out of poverty. In 2012 the EITC is available to working families with dependent children that have annual incomes below about $36,900 to $50,300, depending on the number of dependent children and marital status. (Workers without children at least 25 years old that have incomes below about $13,900, or $19,200 if filing jointly, can also receive a very small credit.) The Child Tax Credit offers a $1,000 income tax credit for each dependent child under 17 for single taxpayers with annual incomes less than $75,000, and couples with annual incomes less than $110,000. Many working parents claiming the EITC and Child Tax Credit also receive the Child and Dependent Care Credit, which provides a credit worth between 20 and 35 percent of child care expenses, depending on family income, for up to $3,000 in child care expenses for one child under the age of 13 (or an adult dependent incapable of self-care) and $6,000 for two or more children or dependents.
Twenty-five states and the District of Columbia have implemented their own state versions of the EITC to supplement the federal credit and reduce the substantial state and local tax burden on low- and middle-income working families. Almost all of these are calculated as a percentage of the federal credit and are refundable. Twenty-four states have also enacted state Child and Dependent Care Tax Credits and four states have implemented their own Child Tax Credits to help working parents in their states make ends meet.
These tax credits will see an unusually high level of activity in both federal and state legislatures in the coming year. Congress and President Obama face an impending “fiscal cliff” of automatic tax increases and deep spending cuts set to begin on January 1st. Their negotiations over how to resolve this cliff, and set a framework for deficit reduction, have the potential to either improve or severely damage the economic security of our nation’s working families.
If all the tax cuts are allowed to expire at the end of 2012, those most at risk include many low- and moderate-income working families with children who could pay hundreds or even thousands of dollars more in taxes because the EITC, Child Tax Credit, and Child and Dependent Care Credit would revert back to their previous levels. The Tax Policy Center estimates that if the improvements enacted under the American Recovery and Reinvestment Act (ARRA) expire as scheduled, 11 million working families will lose an average of $854 from their Child Tax Credit, and 7 million families will lose an average of $532 from their EITC. Improvements to the EITC, Child Tax Credit, and Child and Dependent Care Credit enacted as part of the Bush-era tax cuts are also scheduled to expire. For example, if the Child and Dependent Care credit expansion expires, that will reduce the maximum value of the credit for working parents with one child from $1,050 to $720, and for families with two or more children from $2,100 to $1,440. While there is broad consensus that the Bush tax cuts for working families should be extended, extension of the ARRA credits is far more controversial.
Unfortunately, the expiring improvements are not the only threat to these credits. Some members of Congress have proposed reducing tax expenditures such as deductions and credits to increase revenue in a deal to resolve the fiscal cliff. That could threaten not only the improvements made to the credits, but the existence of the credits altogether.
If the federal credits are reduced or eliminated, that will also reduce or eliminate many of the state credits—most of which are calculated as a percentage of the federal credits. However, that is not the only threat to the state credits. This past year, policymakers in Kansas attempted to repeal its EITC, and were successful in eliminating its Child and Dependent Care Credit, while Oklahoma saw proposals to eliminate its EITC, Child Tax Credit, and Child and Dependent Care Credit. These and other states are likely to see further efforts to make cuts to state credits in 2013. In North Carolina and Oregon, the state EITCs will expire in 2013 unless the state acts to extend them. Last year also saw efforts in many states to improve their family tax credits and we already know that there will be new opportunities to create or improve these credits in a number of states in 2013.
These tax credits are widely recognized as effective anti-poverty strategies that encourage work and provide an opportunity for low- and middle-income families to save or invest. Next year will be a critical year at both the federal and state levels for these key credits, which are an essential tool for the millions of working Americans trying to support their families and build their assets while living paycheck-to-paycheck.