EITC and min wages-1

EITC and min wages-1 - EITC and Minimum Wages 1 Earned...

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EITC and Minimum Wages 1
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Earned Income Tax Credit What is it? Who is eligible and what are the benefits? History and usage? Economic model and behavioral responses. Empirical evidence of effects of the EITC. 2
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What is the EITC? Refundable income tax credit for low-wage workers and families Refundable means families that do not owe tax still receive the full benefit as a tax refund Credit Reduces dollar-for-dollar (vs. a deduction which reduces taxable income) Must have earned income Most receive the credit in a lump-sum form after they file. 3
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Maximum Credits Tax Year 2010 maximum credit: $5,666 with three or more qualifying children $5,036 with two qualifying children $3,050 with one qualifying child $457 with no qualifying children 4
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Eligibility Must have a valid SSN. Must have earned income during the year. Adjusted gross income less than: $43,352 ($48,362 married filing jointly) with three or more qualifying children $40,363 ($45,373 married filing jointly) with two qualifying children $35,535 ($40,545 married filing jointly) with one qualifying child $13,460 ($18,470 married filing jointly) with no qualifying children Investment income less than $2,950 Filing status everything but “married, filing separate return”. Cannot be a qualifying child of another person. 5
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Qualifying child Son, daughter, adopted child, grandchild, great-grandchild, stepchild or eligible foster child and Was under age 19 or under age 24 and a full time student; or permanently and totally disabled Lived with you in the U.S. for more than ½ the year. Can’t be claimed by more than 1 person 6
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EITC 7
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States also have EITC programs 8
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Take-up About 80-85% of eligible taxpayers receive the EITC. Characteristics of eligible non-participants: Eligible for smaller credit/no qualifying children Lower household income Larger family Male-headed household More self-employment income First language not English Several states and cities conduct outreach on the EITC to encourage those who are eligible to file. 9
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Benefits for Tax Year 2008 (for single parent with at least 2 kids) Credit of 40% for earnings up to $12,060 (maximum credit is $4,824) for 2+ kids. C = Y(.4) if income below $12,060. Earnings between $12,060 and $15,740 still receive the maximum credit. C=$4824 if $12,060 < Y <=15,740. Credit reduced by 21.06% for earnings above $15,740. Thus, credit is phased out at $38,646. C=4824 [(Y-15,740)*.2106] 10
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graphically 11
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Work disincentives - graphically 12
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EITC and min wages-1 - EITC and Minimum Wages 1 Earned...

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