I have a general understanding of how the EITC works, but I can’t grasp how the tax credts and refunds are caclulated. I spent some time on the IRS web site, but my eyes started glazing over. Can someone explain it in plain English and offer some exampled of how it would work for various income levels? Much appreciated!
I’m primarily interested in how it works in the US, but if anyone has insights from other countries, I’d love to hear that, too.
Ycan think of it as a table of taxes you own on income. You look for your income on the left and then read the amount of taxes you owe in the right column. If your income is lower than a certain point then you don’t owe taxes you get money.
Income Tax EITC
30K 1K 0
20K 0 0
10K 0 1K
What exactly are you trying to find out?
I’m no expert, but the way I understand it, the Earned Income Credit is designed to increase the income of the working poor by giving them a tax “refund” that is larger (often much larger) than the amount of income tax they paid. The more money you earn from working, the more of a credit you get, up to a maximum that corresponds well with the amount a minimum-wage earner working full-time would earn in a year. Then it starts to decline again until it gets down to nothing. Also, you get more money if you have two kids than if you have one or none.
A minimum-wage earner working full-time with two children can get around $4000 from the Earned Income Credit, last time I checked. It’s an extremely significant chunk of change for a poor family.
It is the Negative Income Tax people sometimes call for. If you have a job, but make below a certain amount, the Government gives your money rather than take it.
One unfortunate stipulation of the EITC (unfortunate for me, that is) is that you must be at least 25 years old to qualify (I’m 21. Or I would otherwise qualify). I believe the purpose of this is to give it more to families than young adults such as myself, but I still think it’s an ageist policy.
It’s really there as a boost to single working Moms. who otherwise might not work at all.
Actually, that’s only if you don’t have children. And if you don’t have kids it’s not nearly as much of a credit anyway. I checked the tables for tax year 2006 today. The maximum credits are:
If you don’t have children: $412, for incomes from $5,300.01 to $6,750 (if you aren’t filing as married filing jointly) or from $5,300.01 to $8,750 (if you file as married filing jointly)
If you have one child: $2,747, for incomes from $8,000.01 to $14,850 (not married-filing-jointly) or $8,000.01 to $16,850 (married-filing-jointly).
If you have two or more children: $4,536, for incomes from $11,300.01 to $14,850 (not married-filing-jointly) or $11,300.01 to $16,850 (married-filing-jointly).
A huge chunk of change for a family earning $11,300.01; it basically gives them half again as much money as they would’ve made otherwise during the year.
Hmm… so would it be better to file “married filing seperately” in some cases? Is this the origin of the phrase “marriage tax?”
-FRL-
No that would be super-bad. You get the maximum credit if you file as “married filing jointly.” In fact, if you file as “married filing separately,” you can’t take the Earned Income Credit at all. When I said “not married-filing-jointly,” I should have specified that you have to be “single,” “head of household,” or “qualifying widow/widower.”
The “marriage tax,” as I understand it, is basically a commentary on the fact that the standard deduction for a married couple filing jointly is not anywhere close to twice as large as the standard deduction for an individual. So two people who file their taxes separately can get a larger percentage of their combined income exempted from taxes than they would if they file jointly.
The reasoning, IIRC, is that two people who are married are supposed to be living together, and thus the expenses (chiefly rent or other housing expenses) will be lower than for two people living separately.