Preserving the State Earned Income Tax Credit What is the Earned Income Tax Credit (EITC)? The federal EITC is a tax credit for working individuals and families who make less than $48,300 a year, depending on filing status and the number of qualifying children in the household. Michigan has had an additional state EITC since 2008, which was enacted with widespread, bi-partisan support. Depending on income, the federal EITC can offer a refund of up to $5,600 on federal income taxes. For state income taxes, individuals get an extra 20% of the federal refund. During the 2008 tax year, the average net EITC refund was over $2,000 for individuals in Michigan. How does the EITC help the community? The federal EITC helps bring federal money into Michigan’s economy. According to a 2009 report by the Anderson Economic Group, for every $1 brought into a community through the federal EITC, $1.67 is generated in new economic activity. The state EITC has a similar ability to “multiply” dollars as they change hands in the community. Both the state and federal EITC put money into the hands of the families most likely to spend it at local businesses, usually on basic necessities like groceries, clothing, or transportation. The state EITC also serves as an additional incentive to claim the federal EITC. How does the EITC help individuals and families? Each year, families substantially increase their annual income by utilizing the EITC. In fact, the EITC lifts more families out of poverty than any other federal aid program. Without the state EITC, Michigan’s tax structure would be among the most unfair in the nation. Other taxes (such as the payroll and sales taxes) place proportionately higher costs on low-income families. This refundable tax credit evens out the overall tax burden among Michigan families. In 2010, over $25 million in tax credits were returned to residents of Wayne, Oakland and Macomb counties. UWSEM encourages families to use their refund to become financially stable, such as by paying debts, providing basic necessities, and saving. A 2003 study indicated that 15% of taxpayers receiving a refund opened a savings account – paving the path to the financial mainstream. Opening a savings account is positively related to refund size – the smaller the refund received, the less likely the unbanked taxpayer is to open a savings account. A 2008 paper published by the Federal Reserve Bank of Chicago cited that “recipient household spending in response to EITC payments is concentrated in vehicle purchase and transportation spending. Given the crucial link between transportation and jobs, we believe this finding is consistent with the EITC’s goals”. The same study linked higher sales of goods in the month of February to the EITC. Who can get the EITC? The EITC is based on adjusted gross income (AGI). The following groups qualify: Families with three or more qualifying children with an AGI of $43,362 ($48,362 if married filing jointly)\ Families with two qualifying children with an AGI of $40,363 ($45,373 if married filing jointly) Families with one qualifying child with an AGI of $35,535 ($40,545 if married filing jointly) Families with no qualifying children with an AGI of $13,460 ($18,470 if married filing jointly) How does the EITC affect the state budget? The EITC is one of many tax expenditures, which together amount to $36 billion a year in reduced revenue for other state programs. The state EITC makes up only a small portion of that – about $336 million annually. Some of those other tax expenditures help out large corporations and wealthy individuals. Before attempting to eliminate the EITC, lawmakers should fairly consider all expenditures. Low-income working families have the most to lose in our struggling economy. EITC is one of the most efficient, simple spending strategies a state can use to help working families. Since EITC is administered using the pre-established income tax infrastructure, administrative costs are typically below 1%. Additionally, the EITC works to actively reduce dependence on all forms of public assistance. It is effectively designed to encourage recipients to work as much as possible. The EITC Initiative is a function of the Regional Asset Building Coalition. Partners include: AARP, Accounting Aid Society, Bank of America, Community Action Agency, GreenPath Debt Solutions, Internal Revenue Service, Macomb County Asset Building Coalition, The Tax Credit Initiative Coalition of Oakland and Livingston Counties, United Way for Southeastern Michigan, Wal-Mart Foundation, Wayne County Asset Building Coalition, and Wayne Metropolitan Community Action Agency.
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