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States boost earned income tax credits for pandemic relief

admin by admin
August 19, 2021
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States boost earned income tax credits for pandemic relief

A growing number of states have leveraged funds from the American Rescue Plan to add or improve earned income tax credits for families most affected by the coronavirus pandemic.

The earned income tax credit, known as EITC, provides low- to moderate-income families with a write-off. To qualify, taxpayers must have earned income, which is wages and payments other than investments.

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The federal EITC is refundable, meaning it can reduce tax bills or provide a refund, regardless of liability. However, some state-level EITCs may be nonrefundable, covering only up to taxes owed.

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Ten states — Colorado, Connecticut, Indiana, Maryland, Missouri, New Jersey, New Mexico, Oklahoma, Oregon and Washington — have passed bills to improve EITCs, and there is pending legislation in Delaware and the District of Columbia.

“The earned income tax credit is a great tool for states to use to help lower-income workers because they get to piggyback off the work of the federal government,” said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center.

Workers may receive the federal EITC based on earnings, phasing out above certain income levels, and the state-level tax breaks are typically a percentage of the federal credit, following the same eligibility rules.

“They just copy and paste the federal rules, stick them in the state tax code, and then just give a percentage of the amount of money that they got from the federal credit,” he said.

However, every state is different and the latest round of changes may vary, Auxier said.

For example, Indiana boosted its EITC to 10% from 9% of the federal credit, whereas the District of Columbia is pushing for a hike to 70% from 40%. While the difference may be tens of dollars in Indiana, it may be worth thousands in the district, he said.

 

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