Enacted in 1975, the federal Earned Income Tax Credit (EITC) has encouraged and rewarded work over welfare by supplementing working-poor families’ income through the tax system. The amount of the credit is graduated according to family income and composition. For example, a married couple filing jointly with two children and an earned income of $15,000 in 2016 would receive a tax credit of $5,572. Working-poor childless adults are also eligible for an EITC of a maximum of $506.
The EITC is refundable, which means that if the family does not owe any federal taxes after the credit is applied, they will receive the balance as a tax refund, thus raising their total income. In combination with the child tax credit, the EITC helped raise 10 million people, half of them children, out of poverty in 2015.
Twenty-six states and the District of Columbia also have EITCs for their own state income taxes. Ohio taxpayers eligible for the federal EITC can get a state EITC valued at up to 10 percent of their federal credit. However, Ohio’s EITC is not refundable and is capped for families making more than $20,000. The effect of these limitations is that while almost one million Ohioans get the federal EITC, fewer than 600,000 get the state credit. Senate Bill 35, introduced in the current Ohio General Assembly, would help alleviate this situation by making Ohio’s EITC refundable.
In addition to encouraging work and lifting people out of poverty, the EITC provides an economic stimulus to communities. Low-income people tend to spend their tax refunds on necessities rather than put them into savings. This creates a local economic impact that can be up to twice the value of the credits themselves.
As this year’s tax filing deadline approaches, it is important that low-income families be aware of the EITC. Twenty-one percent (7 million) of taxpayers who are eligible for the federal EITC do not claim it. Volunteer tax preparation services targeting this population can help make this benefit available to those who need it.
Policy Basics: The Earned Income Tax Credit. Center on Budget and Policy Priorities. October 21, 2016.
Natalie Holmes and Alan Berube. The Earned Income Tax Credit and Community Stability. The Brookings Institution. November 20, 2015.
Ohio Impact: The EITC works for working people. Policy Matters Ohio. April, 2015.
Hannah Halbert, Kalitha Williams, and Kate Lewis-Lakin. Making Ohio’s EITC work for workers. Policy Matters Ohio. April, 2015.
Kalitha Williams. Senate Bill 35 improves Ohio EITC. Policy Matters Ohio. March 22, 2017.