The EITC: The good, the great and the unfortunate

It’s no surprise that the Earned Income Tax Credit (EITC) is one of my favorite topics to talk about (I’ve talked about it here, and here, and here, and pretty much to anyone who will listen). I didn’t have a chance to write about it much in the past year, mostly due to other on-going state and federal tax issues, so I’m glad to be back promoting this great credit at tax time.
Too many taxpayers with low to moderate incomes don’t claim all of the credits they are eligible for at tax time, and today is dedicated to raising awareness about all of the awesome things that the EITC can do! The EITC is a sensible tool for helping Michigan’s families keep working and make ends meet.
During 2017, the Internal Revenue Service (IRS) reported that 766,000 Michigan taxpayers claimed the EITC, and received about $2,489 on average. This put $1.9 billion back into our local economies, as recipients used their credits to pay for things that helped them keep working, such as child care and transportation, as well as groceries, utility bills and paying down debt.
Michigan also provides an added boost to these residents through a state EITC equal to 6% of the federal credit. In the 2015 tax year (filed in 2016), about 757,000 households raising over 1 million children benefitted from the Michigan EITC. The state credit averaged $145, with families raising at least two children receiving a bigger benefit, and put $109.5 million back into Michigan’s economy. The Michigan credit itself helped pull more than 6,500 households above the poverty line.
That’s the good news, but we could make it much better.
To maximize its benefit, the Michigan EITC should be restored to 20% of the federal credit, where it was before being cut to 6% in 2011. The dollars from an increased state credit would flow right back into local economies and give Michigan businesses a boost. The EITC also has a long-lasting positive impact on the lives of children, whose parents are better able to meet their needs. Research shows that children in working families getting the EITC are more likely to perform better and go further in school and to work and earn more as adults. If the credit had been 20% in 2015, recipients would have seen an average of $337 more.
Unfortunately, the federal tax bill that was signed into law will have a small impact on federal, and therefore state, claimants. While the bill did not make any direct changes to the EITC, the change in the inflation adjustment will erode the federal and state EITC over time. According to modeling by the Institute on Taxation and Economic Policy, in 2019 about 1,400 fewer filers (about 0.4%) will qualify for the credit, resulting in $7 million in fewer federal credits being distributed to the state. By 2027 about 14,500 fewer filers (about 2%) will qualify for the credit, resulting in a loss of $96 million of federal credit value. The same filers who lose their federal EITC will also lose their ability to claim their state EITC, resulting in a loss of additional local economic support.
Also, currently about 1 in 5 Michigan residents who are eligible for the credit do not claim it. A married couple filing jointly with three kids can make up to $59,930 and still qualify for a credit. A single parent raising one child can earn up to $39,617 and receive a credit. Families with children receive a greater credit than those without.
To see if you’re eligible, and to get some free tax preparation help, go to: http://michiganfreetaxhelp.org/. Do not pay for a rapid-refund product that will cost you more in the long run than if you wait for your tax return to be processed and refund to be paid. And please help spread the word about all the good the EITC does in Michigan and what we can do to improve it.

— Rachel Richards