Earned Income Tax Credit
The Earned Income Tax Credit is one of the major poverty fighting tools of the United States Government. It is designed to help low income families and encourage them to work rather than depend solely on welfare.
The Earned Income Tax Credit was first enacted into law in 1975. The Earned Income Tax Credit (EITC), or as it is sometimes called The Earned Income Credit (EIC) was designed as a tool to encourage low income workers to continue to work rather than lose hope and depend entirely on welfare. When the credit exceeded the amount of taxes owed it could result in a considerable refund. In 2004, over 21 million taxpayers received around 36 billion dollars in refunds because of the Earned Income Tax Credit.
In order to be eligible, the tax payer and his spouse, if filing jointly, and any children claimed as dependents must have a valid social security number. They also must file a tax return, of course, even if the amount of income earned does not obligate them to do so. Earned Income is defined as income that is actually earned through work. It does not include investment earnings or payments received for anything else except actual work.
The Earned Income Tax Credit also has no impact on the eligibility for certain other welfare benefits such as Supplemental Social Security, Food Stamps, or other types of assistance. The credit was responsible for raising the income levels of almost 5 million, of the 21 million taxpayers who claimed it in 2004, over the poverty level. Yet, it is estimated that millions of eligible low income tax payers do not claim it despite the efforts of the Government and tax preparations professionals to encourage its use.
The Earned Income Tax Credit receives much bipartisan support in Congress as an effective tool for poverty control. It is argued that a small raise in the percentages of the credits could have a much more positive impact on the plight of low income workers than a major raise in the minimum wage. This is because the majority of workers who are eligible for the earned income credit are working at minimum wage jobs, but a raise in the EITC would not have the negative impact on the small business owners.
The methods of computing the tax and determining eligibility are not overly complex and the IRS website even offers a step by step “EITC Assistant” that will walk the tax payer through it. However, most low income workers have not yet become part of the internet world and the burden for making tax payers aware and assisting them in the process of claiming this benefit falls most often on the tax preparer.