Earned Income Tax Credit (EITC)

Jun 30

Contributors

Lillian Han is an undergraduate senior at Columbia University majoring in Economics-Mathematics. She is interested in monetary policy, labor economics, and game theory, and interns at the Federal Reserve Bank of Dallas as an economics research assistant. She enjoys teaching and worked as a teaching assistant for Columbia’s math department and taught a course on Game Theory and Economics at Johns Hopkins’ Center for Talented Youth.

Key things to know

Earned Income Tax Credit (EITC) is a federal tax credit for low to moderate income working individuals and couples. It is one of the most effective social welfare and anti-poverty programs for working-age people in the U.S, lifting about 5.6 million people out of poverty in 2018, including three million children.
EITC only benefits those who work and has three phases: phase-in (credit rises with income), plateau (credit maxes out), and phase-out (credit declines with income)
The amount of credit and the rate at which the EITC phases in depends on the recipient's income, marital status, and number of dependent children.
EITC boosts labor force participation, but has unclear effects on hours worked
About 80 percent of EITC eligible taxpayers claim the credit each year, a high rate among federal safety net programs. Still, millions of families who are eligible for the EITC do not claim it, leaving almost $7 billion of EITC behind each tax year.
EITC also stimulates local economies, with spending by recipients generating roughly double the original credit in local impact.
In a 2021 survey of members of the American Economic Association, 90% of economists believed that the EITC program should be expanded.

Overview - Who qualifies for EITC, and how much?

The EITC has grown considerably since its inception, from $5.5 billion in 1975 (in constant 2015 dollars) to $69.5 billion in 2015. The EITC also saw a dramatic increase in recipients, from 6.2 million in 1975 6o 28 million by 2015.

A geographic distribution of the EITC’s impact shows how its benefits are concentrated among low-income Americans. The graph below shows the average EITC amount claimed per return by county in 2016. The highest average values can be found in areas of rural America that generally have lower incomes such as southern Texas, eastern Kentucky, the Mississippi Delta, and parts of South Dakota reservations. Higher average values can also be found in some urban counties - for example, Wayne County, Michigan, Baltimore, Philadelphia, and certain areas of New York City.

By design, EITC consists of three “phases” and only benefits people who work. As earned income increases, credit also increases (phase-in) until it hits the maximum credit. Once the credit reaches its maximum value, it stays constant (plateau) before the credit decreases gradually with each additional dollar until no credit is available (phase-out). The amount of credit and the rate at which the EITC phases in depends on the recipient’s income, marital status, and number of dependent children.

For the 2025 tax year, the maximum earned income tax credit amounts, depending on your filing status and the number of children you have, are $649, $4,328, $7,152, and $8,046. The table below states these maximum EITC amounts and the most you can earn before the benefit phases out.

A more detailed chart including the phase-in and phase-out rates, as well as when they begin and end, is included below for the 2023 tax year. For example, the phase-in rate for a married couple filing jointly with two children is 40%, meaning that the EITC rewarded recipients with 40 cents for each dollar they earned up to $16,510. Once they receive the maximum credit amount of $6,604, this amount stays constant until their combined income reaches $28,120, after which they have a phase-out rate of 21.06%. This means that for every dollar of income earned, their EITC will be reduced by 21.06 cents, until they no longer qualify for EITC at a combined income of $59,478.

The graph below depicts a visual representation of the phase-in and phase-out of the EITC discussed above, but for the 2019 tax year.

For more information and resources on EITC qualifications, how to claim the credit, and other credits you may be eligible for, visit the following link: https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc

Case studies

Suburban America and Economic Spillovers

The EITC, though not initially designed as an antipoverty tool, has evolved into one of the most effective mechanisms for lifting low-income workers above the poverty line - especially in suburban areas where poverty has grown rapidly and outpaced the capacity of traditional place-based aid programs. In 2015, the US federal government spent about $82 billion per year across more than 80 place-focused antipoverty programs, and many were not well-suited to suburban contexts. Because suburban poverty is more geographically spread apart and underserved by federal funding formulas as opposed to urban poverty, the EITC’s direct cash transfers are especially important in supporting the shifting geography of need. From 2000 to 2013, the number of suburban filers claiming the EITC rose by 62 percent, compared to the 33 percent in cities. EITC is also effective in reducing race-based income gaps in suburbs, especially for Black and Hispanic households. A research study by Hardy, Hokayem, and Ziliak (2022) finds that, over a 40-year period, the EITC reduced income inequality between Black and white households at the median and 25th percentile of the income distribution, although the program’s effect on very low-income households - those as the 10th percentile of income or lower - is minimal.

Besides supporting low-income families, the EITC also generates crucial economic spillovers to the wider community. A 2007 analysis of the economic impact of federal EITC in California found that EITC payments contributed to over $5 billion in business sales and helped add nearly 30,000 jobs. EITC has also been linked to positive health outcomes, particularly for infants and mothers. Generosity of state EITC policies is found to be positively associated with significant reductions in frequent mental distress and poor physical health. Through a local multiplier effect - combining direct, indirect, and induced impacts - EITC dollars stimulate spending, business activity, and income growth, creating community-level economic gains equivalent to at least twice the amount of EITC dollars received.

“Gaming” the EITC

It is very difficult to figure out exactly how the EITC shifts each family’s opportunity sets - few people have the time or effort to work their way through the complex EITC parameters to figure out how their budget lines have shifted. As a result, many people in the target population may not take full advantage of the tax credits. On the other hand, some workers may have an ability to manipulate their reported incomes in such a way that would maximize the credit granted by the EITC. Self-employed workers, who have more flexibility to manipulate their reported incomes compared to salaried workers, may quickly realize that they can increase their tax credit by reporting an income number that “just happens” to take full advantage of the tax credit the EITC program grants to low owners. A study by Chetty, Friedman, and Saez (2013) that uses tax records of the US population between 1996 and 2009, covering over 75 million EITC-eligible individuals, found that many self-employed workers strategically reported income at exactly the refund-maximizing “kink” point of the EITC schedule - 6.5% of claimants in Chicago in 2008 did exactly this. The extent of this income “bunching” varies by location, reflecting differences in local knowledge about the EITC. Notably, self-employed individuals who moved from “low information” to “high information” ZIP codes consistently claimed larger EITC refunds after relocating, suggesting that awareness and understanding of the credit’s structure significantly influence how people claim it.

Minnesota’s “Claim it!” Campaign and California’s Employer Notification Requirement

Millions of American families who are eligible for the EITC do not receive it, either because they are unaware of the program, or because they do not understand the process of claiming their benefits. The IRS estimates that about 20% of eligible taxpayers do not claim over $7.3 billion of EITC each tax year. To address these informational and logistical barriers, many nonprofit organizations have begun programs designed to raise awareness of the credit and assist with the filing of relevant tax forms. Launched in 2006, Minnesota’s “Claim it!” campaign aims to assist residents in claiming the EITC. The campaign involves nonprofit organizations partnering with government agencies to raise awareness and provide tax filing assistance. Efforts included outreach to younger workers and advocacy for policy changes to make the EITC more accessible to immigrant families. In California, employers subject to the state’s Unemployment Insurance Code are mandated to notify all employees about their potential eligibility for the federal and California EITC around the time they distribute annual wage summaries. These initiatives reflect broader efforts to ensure eligible individuals are informed about and can access the benefits of the EITC.

Potential pitfalls

Improper payments: the direct cost of the EITC to the federal government was about $56 billion in 2012, and the IRS estimated that around a quarter of this cost was due to payments that were issued improperly to recipients who did not qualify for the EITC benefit they received. These overpayments largely stem from the inability to authenticate qualifying child eligibility requirements and misreported taxpayer income.
Insufficient EITC for childless workers: workers without dependent children in the household are only eligible for a meager credit. During the 2020 tax year, a tax filer without children at home with incomes below $17,640 ($24,210 for married couples) received an average EITC of just $295. Both democrats and republicans have proposed amendments to provide substantial amendments for this demographic.
Lump-sum payment challenges: Many recipients use their EITC lump-sum refunds to pay down debt or cover deferred expenses . In 2013, EITC recipients were more likely than non-recipients to use refunds to pay off debt rather than to save, suggesting that the current system encourages a reactive pattern of financial “catching up” rather than stability. A solution could be to switch to smaller, more frequent payments as to help families manage their financial obligations more smoothly and avoid incurring new debt
Negative work effect: A concern about the generally positive labor force participation effects regards the second earners in married households. Because the amount and rate at which EITC phases in depends on marital status and household income, it is likely if a spouse decides to start working, the family would receive less EITC.
Complexity: Because EITC is a particularly complex credit, with rules and calculations regarding different forms of income, number of children, and marital status, the EITC generates a large bureaucratic cost in the form of advising and monitoring tax preparers and auditing. For individuals, the IRS guidebook for the EITC is 37 pages long and the rules are very complicated.

Conclusion

The Earned Income Tax Credit is a highly effective tool for reducing poverty, encouraging work, and generating local economic benefits. It has broad support among economists and policymakers, yet challenges remain, including its complexity, limited support for childless workers, and low awareness among eligible recipients. Reforms like simplifying the program, expanding benefits, improving outreach, and offering periodic payments could strengthen its impact and ensure more working families receive the support they deserve.