Budget Basics: What Is the Earned Income Tax Credit?
The earned income tax credit (EITC) is a refundable tax credit aimed at reducing poverty. It was first enacted in 1975 on a temporary basis amid broader debates about welfare reform, with the primary goal of encouraging people to obtain employment. The credit is one of the largest antipoverty programs administered by the federal government, benefiting low-income working families.
The Joint Committee on Taxation (JCT) estimates that 24 million taxpayers received the EITC in 2025. The total cost of the credit that year was $67 billion. The Internal Revenue Service (IRS) estimates that 81 percent of those eligible received the EITC in 2022, which is the most recent data for participation rates.
How Does the EITC Work?
A taxpayer’s EITC is determined by their income, number of dependent children, and filing status. For example, in 2026, a single person with one qualifying child can earn up to $51,593 while still being eligible for the EITC. Single people with no qualifying children making less than $19,540 would be eligible for the EITC (as long as they are between the ages of 25 and 64 years).
Filers receive a credit equal to a percentage of their earnings, up to a maximum amount. For 2026, the maximum EITC for a single filer with one child was $4,427; the maximum credit for a filer without dependent children was $664. The maximum EITC and income thresholds are adjusted each year for inflation.
In addition to the federal EITC, 31 states, the District of Columbia, Puerto Rico, and Guam have EITCs. State EITCs provide additional benefits by reducing an individual’s liability for state income taxes. Those credits are similar to the federal credit, but their eligibility standards, credit amounts, and refundability vary.
Who Receives EITC Benefits?
The EITC is targeted to low-income taxpayers. According to JCT, 84 percent of the tax benefits from the EITC went to those with income below $50,000 in 2025. The remaining 16 percent of expenditures for the credit went to those making between $50,000 and $100,000. In 2026, the credit completely phases out for anyone making more than $70,244.
The tax credit is also targeted towards taxpayers with children. According to the IRS, taxpayers without children only received 4 percent of EITC expenditures, yet they accounted for 28 percent of EITC filers. The maximum credit for a filer with one child is six-and-a-half times larger than the maximum credit for a filer without children.
The concentration of EITC-receiving filers is generally higher in southern states and counties with Native American reservations. The states with the largest proportion of EITC-receiving filers include Mississippi, Louisiana, Arkansas, Alabama, and Georgia.
Anti-poverty Effects of the EITC
The EITC is one of the most significant tools used by the federal government to reduce the number of people experiencing poverty in childhood and during working age. According to the U.S. Census Bureau, the refundable portion of the EITC is the most consequential federal program that reduces child poverty, and the tax credit has a larger impact on child poverty than the child tax credit (CTC), Social Security, and the Supplemental Nutrition Assistance Program (SNAP). Yet, according to the Urban Institute, the EITC is only the third-largest program benefiting children ($59 billion), behind the CTC ($119 billion), Medicaid ($113 billion) (healthcare programs are not considered in poverty calculations), and SNAP ($60 billion). The EITC is also has the second greatest impact in reducing poverty among working-age adults, behind only Social Security.
Research from Harvard University, Columbia University, and the National Bureau of Economic Research suggests that the EITC is also associated with improved mental health in mothers and better health outcomes in children. The research also suggests that the program has long-term positive effects on children’s educational attainment and potential future earnings.
The EITC may also have an effect on the labor market. During the early 1990s, the amount of the credit was increased and the program expanded to include childless workers. Research on the impact of those changes found they led to an increase in the employment rate of single mothers.
The Earned Income Tax Credit and the Budget
The EITC is one of the largest income tax expenditures, costing the federal government $67 billion in 2025, according to JCT. Over the past several years, the inflation-adjusted cost of the tax credit has declined, from $85 billion in 2015 to $60 billion in 2022 (both in 2022 dollars). Between 2008 and 2009, the cost of the EITC increased by 17 percent, likely due to reduced earnings related to the 2008 financial crisis. Expenditures for the credit remained high from 2009 through 2015 and have since declined by an average of 5 percent each year since 2016.
A recent study from Rutgers University suggests that the net budgetary cost of the EITC may be lower than previously estimated. The study aimed to determine whether the credit increased or decreased overall public assistance usage by analyzing the effect the credit had on beneficiaries’ usage of unemployment and disability insurance, the Supplemental Nutrition Assistance Program, and public housing. The authors estimated that the EITC’s net cost is approximately 17 percent of its budgetary cost, a result of increased tax collections and decreased spending on other programs.
What Reforms to the EITC Have Been Proposed?
Reforms to the EITC generally focus on improving the administration of the credit, making claiming simpler for taxpayers and enforcement easier for the IRS. The eligibility requirements for the EITC are currently complex and result in some eligible taxpayers missing out on the credit while others incorrectly receive too large of a credit. In its annual report to Congress, the National Taxpayer Advocate (NTA) suggested three reforms to the EITC that would help the credit achieve its primary purpose of encouraging work:
- Restructure the EITC into a worker credit and a child credit: Now, the credit amount of the EITC is determined both by earned income and family size. The NTA recommends separating the credit. The new worker credit would be based solely on earned income and would support the core objective of the current EITC, which is to encourage work. The child credit could be combined with the existing child tax credit and would be a fixed amount based on the number of qualifying children. The NTA says that separating the EITC into two, simpler credits could reduce improper payments and streamline enforcement.
- Remove EITC age restrictions: For taxpayers without dependent children, the EITC is only available to those ages 25 to 64. In response to the COVID-19 pandemic, lawmakers expanded EITC eligibility to those over the age of 18 (age 24 for students) and to qualified homeless and former-foster youth at age 18. Those changes were applicable only for 2021. The NTA recommends making those eased age-eligibility restrictions permanent to alleviate poverty and provide work incentives for young adults.
- Reclassify unemployment compensation as earned income: Unemployment compensation cannot currently be considered in the computation of earned income to determine EITC benefits. The NTA recommends that lawmakers reclassify unemployment compensation so that it is included under the definition of earned income. Unemployment compensation is only paid to individuals who were separated from work due to no fault of their own, and instances of natural disaster or economic recession may result in significant layoffs. Because unemployment compensation is a temporary replacement for lost wages, the NTA contends that including it as earned income would provide additional support for low-income taxpayers while maintaining the EITC’s connection to work.
Conclusion
The EITC provides assistance to low-income families while encouraging recipients to remain in the workforce. Addressing poverty in the United States continues to be a challenge, and the EITC is an important measure to help combat it. Any proposed expansions or reforms to the EITC carry budgetary consequences that must be weighed against the EITC’s socioeconomic benefits and the nation's unsustainable fiscal trajectory.
Further Reading
What Is Stepped-Up Basis on Capital Gains and How Does It Affect the Federal Budget?
The step-up in basis is a provision in tax law that relates to how assets — such as stocks, bonds, or real estate — are valued and taxed after their owner passes away.
How Does the Capital Gains Tax Work, and What Are Some Proposed Reforms?
While the capital gains tax affects anyone selling a capital asset, higher-income individuals are typically subject to the tax more so than average Americans.
What Is the SALT Cap?
The deduction of state and local tax payments from federal income taxes has been a subject of debate among economists and policymakers over the past few years — with significant implications for our budget and fiscal outlook.