Earned Income Tax Credit

 

Overview

Earned Income Tax Credit, Iowa citizen action network, iowacan.orgThe earned income tax credit supports work and places value on raising children. It makes a big difference in the lives of working Iowa families.

What is the EITC? The Iowa earned income tax credit recognizes the special financial responsibilities of raising children. The EITC is a credit based on “earned income,” meaning filers must work to receive it. Iowa’s credit is tied to the federal EITC, meaning that Iowans who claim the federal credit are eligible for a state EITC worth 7 percent of the federal one.

How many Iowans benefit? Over 500,000 Iowans claimed the state EITC in 2009, according to the Iowa Department of Revenue. Of these, 266,557 were children—37 percent of all children in Iowa.

Why is the EITC good policy? The EITC is recognized across the political spectrum as a successful antipoverty program that insures that people who work are able to provide for their families.

How can we make it stronger? Raise the EITC to 20 percent of the federal rate. This will help Iowa parents who work full time meet their families’ basic needs.

Iowa’s tax code penalizes low-income working families. Working Iowa families with children pay taxes. They pay federal payroll tax, sales tax, gasoline tax and property tax (either with a mortgage or as a share of rent). Families with children actually pay a greater share of their income in these taxes than other families because they spend a greater share of their income on basic needs, including housing.

Many of these families—families with incomes so low they owe no federal income tax—also pay state income tax. Take a married Iowa couple with two kids. Because of the earned income tax and child tax credits, the federal government does not begin taxing this family until its paychecks exceed $45,400. But Iowa begins taxing this family when its paychecks reach $19,100—well below the poverty line.

Iowa is one of only a handful of states that impose income taxes on working families with incomes below the poverty level.

 

Updates

Resources

Iowa Fiscal Partnership (IFP) website

Earned Income Tax Credit

A Hand UP to Iowa’s Working Families

The Earned Income Tax Credit (EITC) is tax credit that helps for low- and moderate-income families make ends meet. It is based on “earned income,” meaning filers must work to receive it.  It has garnered broad, bipartisan support in its 34-year federal history, and 18-year Iowa history, because policymakers know it is a successful strategy to make low-wage work pay, help working families meet basic needs and move them out of poverty.

Expanding Iowa’s Earned Income Tax Credit: Helping to Fill Gap between Income and Basic Needs for Working FamiliesIowa Fiscal Partnership

The Iowa General Assembly is once again considering expanding Iowa’s meager Earned Income Tax Credit (EITC). The Cedar Rapids Gazette editorial board recently had this to say about these efforts: “A state that hands out tens of millions of dollars in tax breaks to large firms in the name of job creation should be able to afford providing a justifiably bigger break to Iowans already on the job. The earned income tax credit expansion is an endorsement of work over dependency, a pushback against a growing tide of child poverty, an economic shot in the arm for local business and tax relief for families that need it most.”[1]

Just how much working families need a boost from the EITC can be seen in light of the actual costs of raising a family in Iowa. Working full time, year round, even at the median wage of about $15 an hour ($31,200, less $2,387 in payroll taxes), is not enough for families with children to cover the costs of food, rent, child care, transportation, and other essentials even on a very basic, no-frills budget. We estimated such basic household budgets for Iowa families of various sizes in our 2012 report, The Cost of Living in Iowa.[2] Results for two family types are shown below. A single parent working full time with a small child would need about $32,300 to meet basic expenses, while a married couple, two-earner family with two children would need over $50,000.

An increase to 20 percent would not undo the shortfall minimum-wage families face in getting to a no-frills budget level, but it would help fill the basic-needs gap for over 200,000 Iowa households, including 37 percent of Iowa children.[3]

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  1. The Gazette, Cedar Rapids. Editorial: “More to spend: Raise tax credit to help working families, boost economy.” Sunday, March 31, 2013.
  2.  Lily French, Peter Fisher and Noga O’Connor. The Cost of Living in Iowa, 2011. The Iowa Policy Project. May 2012.
  3. Iowa Department of Revenue. Iowa’s Earned Income Tax Credit Tax Credits Program Evaluation Study, revised February 2012. 
  4. Charles Bruner. Resolving Inequities in Iowa Taxes. Iowa Fiscal Partnership. February 2012.

Take Action

The easiest way to find out if you qualify for the earned income credit is to use an application found on the IRS Web site called the EITC Assistant.