The Earned Income Credit (EIC) not only encourages work but also reduces poverty, helps families meet basic needs, improves children’s achievement in school and likely increases their earnings as adults. The Child Tax Credit (CTC), a related tax credit designed to help offset the cost of raising children, also plays a pivotal role in helping low-income working families.
- Encouraging work. The EIC promotes work, especially among single parents. The EIC rewards people who find and keep a job by adding to the wages they earn. The EIC encourages full-time work.
- Reducing poverty. The EIC and CTC lifted 9.2 million people — including 4.9 million children — above the poverty line in 2010.
- Providing a short-term safety net. Most EIC recipients claim the credit only temporarily when a job disruption or other significant event reduces their income. During an economic downturn, the EIC can provide relief for families under severe economic stress, enabling them to pay back bills, avert utility shut-offs or eviction, buy groceries, and cover childcare costs and other work-related expenses. EIC recipients as a whole pay far more in federal income taxes than they receive in EIC benefits.
- Improving children’s school performance and increasing their work effort and earnings as adults. Research indicates that lifting the incomes of low-income families helps children in those families do better in school and is associated with a significant increase in the child’s earnings in adulthood.
In 2010, over 27 million working families and individuals received the EIC. Yet, research indicates that 20 to 25 percent of those who are eligible each year fail to claim their credit, either because they are unaware of it or they don’t know how to obtain it. Outreach efforts are necessary to ensure that workers receive all of the benefits for which they qualify.