The Earned Income Tax Credit, or EITC, is a federal income tax credit for low-income working families and individuals. Taxpayers who qualify for this federal tax credit can also take a similar credit against their state income taxes in 23 states and the District of Columbia. According to the Center on Budget and Policy Priorities, a non-partisan research and policy institute, by the end of 2010 nearly two out of five recipients of the federal EITC will live where a state EITC is available. They estimate that annual state EITC benefits will exceed $2.5 billion in 2010.
Also see: List of States with EITCs
State EITC Highlights
Out of 23 state EITC programs, 21 are based on the federal EITC. These 21 states have Earned Income Tax Credits that use the same eligibility rules as the federal EITC, and set the amount of their credits to a specified percentage of the federal credit. However, there are a few states that do things their own way, and some have chosen not to accept the increases to the federal EITC under the American Recovery and Reinvestment Act (ARRA).
Iowa chose not to accept the ARRA, and has set the amount of its credit to pre-2009 federal EITC amounts. Minnesota uses its own system as well. This state has the same federal eligibility rules, but it has designed its own system for determining the amount of the credit that depends on the income of the taxpayer.
Maryland offers a choice between a larger non-refundable EITC credit of 50% of the federal credit or a smaller 25% refundable credit. In Wisconsin, the state credit amount increases as family size increases for a maximum state EITC credit of 43% of the federal EITC amount.
Twenty states have fully refundable credits, meaning that you any credit amount that exceeds your state tax liability is refunded. However, in Rhode Island, eligible taxpayers can only receive a maximum of 15% of their EITC credit as a refund.
Do I Qualify for the Federal and State Credits?
Most state earned income credits have the same or similar qualification rules as the federal earned income tax credit. To be eligible for the federal EITC in 2010, earned income and adjusted gross income (AGI) must each be less than:
- $43,279 ($48,279 married filing jointly) with three or more qualifying children
- $38,646 ($41,646 married filing jointly) with two or more qualifying children
- $33,995 ($36,995 married filing jointly) with one qualifying child
- $12,880 ($15,880 married filing jointly) with no qualifying children
Income from interest, dividends, capital gains, royalties, etc. must be no more than $3,100.
How Much Will My State EITC Be?
Most states use a percentage of the federal amount to calculate the amount of the state EITC credit. The amounts of the federal EITC for 2010 are:
- $5,666 with three or more qualifying children
- $5,036 with two qualifying children
- $3,050 with one qualifying child
- $457 with no qualifying children
State credit amounts range from 3.5% to 45% of federal amounts. See a list of state EITC credits and their corresponding percentages of the federal credit.
Also see: Federal Earned Income Tax Credit
Cities and Counties Offer an EITC
San Francisco, New York City, and Montgomery County, Maryland, offer earned income tax credits at the local level.
The New York City credit is based upon the federal credit and offsets NYC income taxes, which are reported and paid with New York State tax returns. The New York City credit is fully refundable for those who qualify.
The San Fransisco EITC is known as the Working Families Credit and is available to workers who qualified for the federal EITC and made less than $48,300 (for tax year 2009). Although San Fransisco does not have a city income tax, they still offer this credit to help low income families and to raise awareness about the federal EITC. To receive the credit, eligible individuals have to file an application by April 15th.
The Montgomery County, Maryland Refundable Earned Income Credit offsets county income taxes. Maryland county taxes are collected with Maryland state tax returns, so to receive this credit, residents simply have to include it on their state tax return. The Montgomery County EITC is refundable and generally matches the amount of the Maryland state EITC dollar-for-dollar.
The District of Columbia also offers an EITC that offsets city income taxes and is refundable.
Income Tax-free States Can Offer an EITC
In 2008, Washington state became the first state without an income tax to implement an earned income credit. Washington state legislature recognized the burden that state sales taxes were placing on low income families and in order to help alleviate this burden, the state legislature enacted the EITC program for sales taxes. The program, once fully implemented, will allow low income families to receive a refund of sales taxes equal to ten percent of their federal EITC amount or $50, whichever is greater.
The Washington EITC has been postponed due to funding issues, but is expected to be implemented in 2012.
Also see: List of States with Earned Income Tax Credits
Source: Center on Budget and Policy Priorities, State Earned Income Tax Credit: 2010 Legislative Update