The Fiscal Cliff and Working Family Tax Credits
While the national media covered every twist and turn in the fiscal cliff negotiations, little attention was paid to the provisions of the law affecting tax credits for working families. So here’s the bottom line…
As anticipated, the deal makes permanent the changes to the Earned Income Tax Credit (EITC), Child Tax Credit (CTC) and Child and Dependent Care Tax Credit (CDCTC) that were first implemented in the “Bush tax cuts” of 2001 and 2003 tax bills. The marriage penalty relief for the EITC enacted in 2001 is now permanent, raising the income level at which the credit begins to phase-out and ends by $3,000 for married couples and indexing it for inflation. (This marriage penalty relief, however, is superseded for the next five years by a temporary extension of a 2009 expansion of the EITC, as discussed below). The maximum CTC is now permanently set at $1,000 per child (up from $500), and the refundable portion of the credit is now 15 percent of earnings (up from 10 percent) over a benchmark that was set at $10,000 and indexed for inflation in 2001– it is currently around $13,000. (This benchmark, however, will not be in effect for the next five years due to the temporary extension of a 2009 expansion of the CTC, as discussed below). The amount of child/dependent care expenses eligible for the CDCTC is now higher – up from $2,400 to $3,000 for one child/dependent and from $4,800 to $6,000 for two or more children/dependents. The credit is now also worth 35 percent of these expenses (up from 30 percent) for families with incomes up to $15,000 and income level at which families can only claim the minimum percentage of their expenses (20 percent) is now $43,000 (up from $28,000).
The deal also extends for another five years the expansions of the EITC and CTC that were first created as part of the American Recovery and Reinvestment Act (ARRA) of 2009. These improvements will now sunset at the end of 2018. This means that for another five years, the EITC will be 45 percent of the first $12,570 in earnings instead of 40 percent for working families with three or more children. The income level at which the value of the EITC begins to phase out will also now be $5,000 higher for all married couples filing a joint return (regardless of the number of children) than for non-married filers (and $2,000 higher than under permanent law for married couples). In addition, until 2018, working parents can count all of their earnings over $3,000 towards their CTC, rather than just earnings over the higher benchmark mentioned above.
In a subtle but important change, the deal also makes permanent one little-noticed provision of ARRA: refunds from the EITC and CTC will not count as income or resources for 12 months after receipt “for benefits or assistance (or the amount or extent of benefits or assistance) under any Federal program or under any State or local program financed in whole or in part with Federal funds.’’ In other words, tax refunds from the EITC and CTC will not disqualify working families for programs such as Temporary Assistance to Needy Families (TANF) or SNAP (formerly food stamps).