The Earned Income Tax Credit (EITC) has long been touted as a successful tool for lifting children and families out of poverty. In addition to combatting poverty, research shows the EITC improves health outcomes for both children and mothers as well as increases the educational success and earning potential for the families who receive it. Yet, there are still misconceptions about its necessity, who is receiving it, why they are receiving it and what they do with the refund when they get it. We want to dispel some of those myths.
Myth 1: The EITC is a handout
To qualify to receive the EITC, recipients must have earned income, meaning they need to have worked during the tax year for which they are claiming the credit. Data indicates the majority of EITC recipients work in retail or food service jobs and their median annual income is less than $20,000. (Brookings Institute – Characteristics of the CO EITC Eligible Population)
Moreover, according to the IRS, most taxpayers are only eligible to receive the EITC for two to three years—this is often because of a change in income or qualifying children. It is also worth noting that only legal residents or US citizens can receive the Earned Income Tax Credit, meaning both the taxpayer and any qualifying children must have a Social Security number.
Myth 2: EITC fraud is widespread
For the last several years, the IRS has delayed issuing refunds to those who receive the EITC or ACTC (Additional Child Tax Credit) in order to conduct a thorough review of those returns to ensure proper payments. Those reviews revealed that more often than not, in situations where the EITC is claimed incorrectly, it is a result of a misunderstanding of the tax credit’s complex rules.
Tax Help Colorado Program Manager Courtney O’Reilly explained, “There are roughly 10 rules that apply to EITC eligibility. One of the most challenging tests is determining if someone is a qualifying child. The definition of a qualifying child for EITC purposes is actually different than a qualifying child for dependency purposes. Taxpayers often incorrectly assume that if they can claim a child as a dependent, they can also qualify them for the EITC. If the EITC is inaccurately claimed, it’s more often due to errors than malicious intent.”
Even though tax fraud among EITC recipients is low, data shows that in 2017, EITC recipients were audited at twice the rate of taxpayers with incomes between $200,000 and $500,000. (ProPublica analysis of IRS data). As a matter of fact, audits on the EITC make up as much as a third of all audits conducted.
Myth 3: Taxpayers use EITC refunds for frivolous purchases
Some may assume low-income taxpayers are using their refunds for frivolous purchases. However, Americans with the lowest incomes—those earning less than $50,000—are most likely to use their refunds to pay off debt, including loans or credit cards (CBS news). Many EITC recipients also use their refunds for basic living expenses like clothes, shoes or groceries.
It is also important to understand the more nuanced reality for families with low incomes. A conversation with one of Get Ahead Colorado’s campaign partners illustrated this perspective. “Oftentimes, families in poverty don’t have the disposable income others may have to treat their kids to a movie at the theater or an outing at a bowling alley. So while purchasing a big-screen TV may seem like an extravagant purchase to some, it is really a long-term alternative to more costly entertainment.”
Continuing support for the EITC
Although some of these myths persist, thankfully, support for the federal EITC remains strong between both political parties, and many states are seeking to expand it. In addition, a majority of economists (64 percent) polled in a recent Economic Policy Institute survey believe expanding the EITC is an efficient policy for targeting poverty.
It is imperative that the narrative remains focused on the positive benefits of the EITC—it is unquestionably an investment worth making for our families and for our communities.
Check out our videos to learn more about the impact of the EITC