Editor: Mo Bell-Jacobs, J.D.

This year marks the 50th anniversary of the earned income tax credit (EITC). The legislation establishing this tax credit was first signed into law by President Gerald Ford on March 29, 1975. Since that time, the tax credit has evolved into the “largest permanent federal needs–tested antipoverty program that provides cash assistance” (Congressional Research Service, The Earned Income Tax Credit (EITC): Legislative History (April 28, 2022)). The EITC provides financial help to taxpayers with lower incomes who work by reducing taxes owed and generating a larger refund (IRS webpage, “Celebrating 50 Years of Earned Income Tax Credit“).

The EITC provides a refundable credit to qualifying taxpayers upon filing a tax return. In 1975, the maximum credit was $400. In 2024 dollars that would be about $2,371 (U.S. Bureau of Labor Statistics, CPI Inflation Calculator). For tax year 2025, the maximum credit is now $8,046.

The EITC has had an incredible impact in its 50 years, helping millions of American families and workers. For tax year 2022 (the most recent data available), the IRS estimates 23 million returns were credited with the EITC, providing $57 billion of EITC (IRS, “Earned Income Tax Credit Statistics“). The credit’s success has inspired at least 30 states to adopt their own state EITC programs (IRS, “States and Local Governments With Earned Income Tax Credit“). The federal EITC has endured and evolved throughout the decades.

History of the EITC

Congress passed the Tax Reduction Act of 1975, P.L. 94–12, during a period of economic duress in the nation. The year prior, consumer prices had risen 12%, which declined to 6% in the first four months of 1975, and the unemployment rate was at 9.2% in May 1975 (Congressional Budget Office, “Inflation and Unemployment: A Report on the Economy” 4, 19 (June 30, 1975)). Congress sought a way to bring a temporary boost to the economy (Shabecoff, “Ford Approves Tax Cuts, Saying He Has No Choice; Bars a New Spending Rise,” The New York Times (March 30, 1975)). The EITC was one piece of that legislation. Upon signing the Tax Reduction Act of 1975, Ford addressed the nation; he explained his objective was “to put money in the pockets of the American people promptly” (Ford, “Address to the Nation Upon Signing the Tax Reduction Act of 1975” (The American Presidency Project)). At the time of signing, Ford was not thrilled with the law but signed it because of the urgency of economic struggle. He explained:

Even if I asked the Congress to send me a better bill and it did, it would take too long a time to get one back, and I cannot, in good conscience, risk more delay. But I will work with the Congress to not only remedy the deficiencies in this bill but also the dangerous actions and attitudes towards huge Federal deficits some Members have already shown in other legislative decisions. [id.]

Ford’s consternation highlights some of the tensions surrounding and modifications to the EITC throughout its 50–year history (see the sidebar, “Legislative Timeline of the EITC”).

The EITC today: Requirements and challenges

Today, the EITC is found in Sec. 32, accompanied by regulations in Regs. Secs. 1.32–2 and 1.32–3. The Code allows a credit against tax in an amount equal to a set percentage of earned income up to an income cap. However, numerous requirements may pose challenges for taxpayers. Tax practitioners preparing returns claiming the EITC should pay careful attention to the requirements. Here are two that commonly arise in IRS examinations of the EITC:

Origin of earned income: The EITC’s earned income requirement is part of the credit’s political history as Congress moved away from cash entitlement programs toward aid tied to work. Sec. 32(c)(2) sets out the type of earned income that qualifies. It includes wages, salaries, tips, and other employee compensation but only if they are includible in gross income. In addition, net earnings from self–employment under Sec. 1402(a) qualify. The net earnings from self–employment are determined after applying the Sec. 164(f) deduction for half of the self–employment tax. However, pensions and annuities, community property, earnings of inmates in prison, and income earned by nonresident aliens not connected with a U.S. business do not count. A taxpayer can elect to treat combat zone pay, excluded from gross income under Sec. 112, as earned income for the purposes of claiming the EITC.

It is particularly important for taxpayers claiming the EITC based on income from self–employment to keep good records of that income. While wage earners may easily produce a Form W–2, Wage and Tax Statement, from an employer to prove their earned income to the IRS, a self–employed individual often does not have the same type of information returns available. For tax returns claiming the EITC with self–employment income, IRS examinations scrutinize whether the amount of income reported is accurate. There can be a concern that either the income exceeded the cap or it was invented to bypass the work requirements (see Internal Revenue Manual §4.19.14.6.3). Depending on a taxpayer’s records and credibility, the IRS could impose a two–year ban or penalty (Sec. 32(k)). This result could be devastating to a taxpayer relying on the credit for basic living needs.

Qualifying child: One way a taxpayer may qualify for the EITC is by having a qualifying child (Sec. 32(c)(1)(A)). The qualifying–child requirement presents one of the more complicated pieces of the EITC. Under Sec. 32(c)(3), a qualifying child is defined by reference to Sec. 152(c) without regard to Secs. 152(c)(1)(D) and 152(e) (Sec. 32(c)(3)(A)). The qualifying–child rules under Sec. 152 pose additional issues when two or more persons may claim the same qualifying child. It is important to consult the tiebreaker rules in those situations (see IRS Publication 596, Earned Income Credit (EIC)).

A qualifying child for EITC purposes cannot be married as of the end of the tax year unless the taxpayer is entitled to a deduction under the Sec. 151 dependency exemption with respect to the individual or would be so entitled if not for Sec. 152(e). Additionally, for the EITC, the qualifying child must have a principal place of abode in the United States. There are exceptions to the abode requirements for those who are on active military duty (Sec. 32(c)(4)).

Additionally, to claim the EITC under qualifying–child eligibility, the taxpayer must list the name, age, and Social Security number (SSN) of each qualifying child on the tax return (Secs. 32(c)(3)(D) and (m)). The SSN must be issued before the due date for filing the return for the year (Sec. 32(m)). Further, Secs. 32(c)(1)(D) and (E) prohibit nonresident aliens from receiving the EITC unless an election under Sec. 6013(g) or (h) is made. Tax practitioners serving clients in mixed–residency–status households may need to further study these requirements.

With a dizzying array of requirements, taxpayers may wish to use the IRS’s interactive tool, “Use the EITC Assistant,” to see if they qualify for the EITC.

One way tax practitioners can help: Volunteer with VITA

Every year, roughly 20% of the people eligible for the credit fail to claim it (IRS, “EITC Participation Rate by States: Tax Years 2014 Through 2021“).Tax Adviser readers may be in a position to help eligible taxpayers claim the EITC by volunteering at their local Volunteer Income Tax Assistance (VITA) location (see IRS, “IRS Tax Volunteers“).

Editor

Mo Bell-Jacobs, J.D., is a senior manager with RSM US LLP.

For additional information about these items, contact the author(s) at the email address(es) below.

Contributors are members of or associated with RSM US LLP.

Author

Sarah Sexton Martinez, J.D., M.A. (Sarah.SextonMartinez@rsmus.com), Chicago