TAX CREDITS FOR LOW-INCOME WORKERS

As we highlight throughout this brief, the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), the Child and Dependent Care Tax Credit (CDCTC) and the Saver’s Credit provide crucial support to millions of families each year. They are well-targeted to reduce poverty and are proven to support and encourage work, support children’s development throughout life and boost retirement savings. Unlike many other tax incentives that primarily benefit higher-income taxpayers, these credits are progressive.  As a result, these credits do not need broad restructuring. Rather, reforms are necessary to ensure that these credits are able to achieve their full potential towards helping low- and moderate-income working families. To accomplish these goals, policymakers should build on each credit’s strengths and successes, while also closing gaps in access to the credits and improving their effectiveness. 

HOMEOWNERSHIP AND HOUSING

The federal government is justified in investing in homeownership programs, which can have positive impacts on individuals, communities and the economy. One of the largest tools the federal government uses to invest in homeownership is the Mortgage Interest Deduction (MID), which in 2017 cost more than $65 billion in taxpayer dollars. Unfortunately, the MID does not focus on low- and moderate-income families. In fact, only one out of four taxpayers receive any benefit from the MID, and these households tend to have higher income. Even among households that do benefit, higher-income households receive greater value for each dollar deducted and tend to claim the deduction for much larger mortgages.   The Tax Alliance has adopted a set of principles for reforming the MID that would seek to expand access for lower-income Americans, increase benefits for renters, help communities of color build wealth, and reduce subsidies for high-income households.

EARNED INCOME TAX CREDIT (EITC)

The Earned Income Tax Credit (EITC) is a federal tax credit for low- and moderate-income working people. It supports and rewards work while offsetting federal payroll and income taxes. Twenty-nine states, plus the District of Columbia, have established their own EITCs to supplement the federal credit.

In the 2016 tax year, almost 26 million working families and individuals in every state received the EITC. During the 2016 tax year, the average EITC was $3,176 for a family with children (boosting wages by about $265 a month), compared with just $295 for a family without children.

CHILD TAX CREDIT (CTC)

Enacted in 1997 and expanded with bipartisan support since 2001, the Child Tax Credit (CTC) helps working families offset the cost of raising children. It is worth up to $2,000 per eligible child (under age 17 at the end of the tax year). The CTC also includes a $500 non-refundable credit for families with qualifying non-child dependents.

Taxpayers eligible for the credit subtract it from the total amount of federal income taxes they would otherwise owe. For example, if a couple with two qualifying children owe $4,600 in taxes without the credit, they would owe $600 in taxes with it, because the credit would reduce their tax bill by $2,000 for each child.

CHILD AND DEPENDENT CARE TAX CREDIT (CDCTC)

The Child and Dependent Care Tax Credit (CDCTC) is a nonrefundable federal tax credit that helps families with the child and dependent care expenses they incur in order to work, look for work, or go to school. In 2017, the CDCTC was estimated to provide almost $3.5 billion in tax benefits to nearly 6.3 million families. Today, over half the states, plus the District of Columbia, offer child and dependent care tax provisions that can be claimed in addition to the federal CDCTC (some of which are refundable).

MORTGAGE INTEREST DEDUCTION (MID)

The Mortgage Interest Deduction (MID) is one of the largest tools the federal government uses to invest in homeownership. For taxpayers who itemize deductions, the MID allows them to deduct their mortgage interest from their taxable income for mortgages up to $750,000.

Unfortunately, the MID’s benefits mostly go to households with higher incomes, failing to support the low- and moderate-income (LMI) families who stand to benefit most from building wealth through homeownership.

THE TAX CODE AND THE RACIAL WEALTH DIVIDE

The U.S. tax code is the largest asset-building tool available to our nation’s households. It is a vehicle by which the government helps families build savings and accumulate assets, ultimately creating financial security. Overall, it is moderately progressive, so it modestly shrinks income and wealth gaps. At the same time, though, key features of the tax code drive income and wealth inequality by targeting most of its benefits to wealthy families. This lack of support for lower-income households translates to households of color being largely excluded from tax benefits.

SAVER’S CREDIT

The Saver’s Credit, or Retirement Savings Contributions Credit, is a tax credit that helps low- and moderate-income (LMI) workers save for retirement by incentivizing them to contribute to a retirement plan. To qualify for the credit in 2019, a single filer must make less than $32,000 and married filers (filing jointly) less than $64,000. Head of Household filers must make less than $48,000. The amount of the credit is dependent on a taxpayer’s adjusted gross income and can total 50%, 20% or 10% of that individual’s contributions to his or her employer-sponsored retirement plan or Individual Retirement Account (IRA). 

VOLUNTEER INCOME TAX ASSISTANCE (VITA) PROGRAM

The Volunteer Income Tax Assistance (VITA) program provides free tax preparation services to low- and moderate-income Americans, those with a disability as well as those with limited English proficiency. To qualify for VITA services, an individual must earn $55,000 or less.

Established in 1969, VITA now has over 3,700 sites nationwide with approximately 55,000 highly-trained volunteers. It is a public-private partnership, receiving funding from the federal government as well as local, state and private sources. For every $1 of federal spending, VITA providers are required to secure at least $1 of support from local nonprofit organizations, cities or volunteers. Several states also provide funding for local programs. In essence, VITA is a community-based program, since VITA locations are set up and managed by local nonprofits, rather than the federal government itself.