As tax reform is now a front-page headline, a number of people have written to the editor urging retention or expansion of the Earned Income Tax Credit (EITC). It is efficient, and it provides a significant benefit to lower-income families, especially those with children.
It has one major flaw, however: It is much more generous to unmarried couples than to people — in identical circumstances — who are married. If the couples each have three children, the unmarried couple (where both parents work) can receive a credit about $5,000 higher than the married couple (about $3,000 for two children, $7,000 for four). For lower-income families, this is a substantial difference.
The reason for this difference is that the credit was designed to provide only one credit per family, while the unmarried family receives two. Originally, the taxpayer could receive EITC if filing as head of household or as married filing jointly. If someone filed as single or married filing separately, they were not eligible for the credit. However, so many singles filed as head of household that the IRS could not enforce that provision. So Congress substituted the provision that the claimed child needed to live with the taxpayer and removed the restriction on single filers. That opened up the opportunity for two benefits to be paid to the same unmarried-couple household. The restriction on married-filing-separately returns was retained.
This increases the amount paid to unmarried couples through two factors:
First, the benefit for a “first” child is much larger than for subsequent children. A first child is disruptive, increasing living space, size of car, clothes, furniture, food, etc. Later children are less so, requiring less of an allowance. Now, unmarried parents can claim two “first” children, one on each return, gaining an additional benefit of $2,655 (first child: $3,359; $694 third child).
Second, the combined income that unmarried parents can have and claim EITC is much larger than the amount a married couple can use. After about $23,000 income for a married couple and $18,000 (or $36,000 combined) for singles, the EITC starts to phase out. The additional $2,500 credit comes from treating the incomes separately (keeping them in the unreduced region of the scale longer) and retaining EITC with a higher combined income.
It’s difficult to prove that these benefits cause people not to marry, but “money talks,” and it has discouraged some of my wife’s tax clients from taking that step. It is likely a contributing factor in the stratospheric rise in unmarried, lower-income couples. And, after many efforts to address “marriage penalties” in the tax code, it is discouraging that this large of a gap remains uncorrected.
If the EITC is retained in tax reform, this gap needs to be addressed. I have suggestions for changes, and I’m sure others do too — but that’s a whole other subject.
Gerald E. Hyde is a retired auditor, having worked primarily for LDS Church Auditing and as director of auditing for Deseret Mutual Benefit Administrators.