The earned income tax credit (EITC) is a part of the tax code aimed at reducing poverty. It was first enacted in 1975 on a temporary basis amid broader debates about welfare reform and had the primary goal of encouraging people to obtain employment. Originally designed to target low-income working families with children, the EITC has since expanded to include middle-income families and, on a much more limited basis, those without children.
The EITC works by reducing an individual’s tax liability, meaning that it reduces the amount of taxes owed. It is also refundable, so if an individual’s liability is smaller than their tax credit, they will receive the difference in the form of a refund.
About 23 million people received the EITC in 2023. The total cost of the program was $71 billion in that year. Nearly 80 percent of those eligible received the EITC in 2020, which is the most recent data for participation rates.
How Does the EITC Work?
Broadly speaking, a taxpayer’s income determines their eligibility for the EITC, and benefits for eligible workers vary by family size and marital status. For example, for 2023, the maximum amount a single person with one qualifying child could earn while still being eligible for the EITC was $46,560. Single people with no qualifying children making less than $17,640 would be eligible for the EITC (as long as they are between the ages of 25 and 64 years).
Workers receive a credit equal to a percentage of their earnings, up to a maximum amount. The credit increases with income up to a certain threshold, stabilizes, and then phases out. For 2023, the maximum EITC for a single person with one child was $3,995; the maximum credit for a childless worker was $600. The maximum EITC and income thresholds are adjusted each year for inflation. Recent changes in law expanded other eligibility criteria for the credit, including workers and their families being able to receive higher amounts of investment income while still maintaining eligibility.
