The federal tax code is getting a lot of attention lately. There has been particular focus on the expanded Child Tax Credit (CTC) and the new feature that allows families to capture the credit through advance monthly payments. This attention is for good reason given the impact it will have on Hoosier families and children, which we recently discussed at length. The CTC dramatically changed through the American Rescue Plan (ARP), which also included an important change to the Earned Income Tax Credit (EITC). Specifically, the ARP expanded the EITC for childless adults by (1) allowing younger and older working adults to claim the credit, (2) increasing the maximum credit, and (3) raising the income threshold at which the credit phases out (for otherwise eligible workers).
Prior to the ARP, childless workers were eligible for the EITC only between ages 25 and 64. The ARP reduced the eligible age to 19 for most workers. Students attending school part-time are now eligible at age 24, and foster children and homeless youth are eligible at age 18. The new law also temporarily eliminated the maximum age for childless workers, allowing workers 65 and older to claim the credit in 2021. And yes, 2021 only. Similar to the CTC, these changes to the EITC are temporary.
The ARP increased the maximum credit for childless workers in addition to phasing in the credit more aggressively and phasing the credit out over a higher income. See below:
Over 367,000 Hoosier workers without children would benefit from this expansion each year, of whom over a quarter are non-White. Approximately 11.4% of Hoosiers would receive a federal tax cut of $690 on average in 2022, providing meaningful relief to individuals who need it the most to meet their basic needs.
While these changes will affect working Hoosiers in a demonstrable way, it is not without unintended consequences and pitfalls. As Congress and the President work to make changes to the EITC permanent, it will be crucial that they eliminate the marriage penalty and extend eligibility to all young adults – regardless of their school enrollment status. Congress and the President have the opportunity to recalibrate our tax code in favor of people. Now is the time to get this right and build upon the work already done.