Earned Income Credit

Total Earned Income Credit (EIC) program costs have risen dramatically in recent years as Congress has extended EIC coverage and increased credit rates. From tax year 1990 to tax year 1994, EIC program costs (in 1994 dollars) increased by about 150 percent. During that same period, the number of EIC recipients increased by about 50 percent. Much of the recent growth in the number of taxpayers claiming the EIC can be attributed to the extension of the credit to childless adults beginning in tax year 1994. About 15 million families with children received $20.5 billion of EIC in tax year 1994; another four million childless adults received an additional $0.7 billion. The refundable portion of the EIC for tax year 1994 was $16.7 billion, or 79 percent of the total EIC.

GAO found that: (1) total EIC program costs increased 150 percent from 1990 to 1994, and the number of EIC recipients increased by about 50 percent, to 19.1 million; (2) the extension of EIC to certain childless adults in 1994 was the main reason for the growth in EIC claims; (3) in tax year 1994, about 15 million families with children received $20.5 billion in EIC, while 4 million childless adults received EIC totalling $700 million; (4) the refundable portion of EIC for tax year 1994 was $16.7 billion; (5) most of the taxpayers claiming EIC for families with children filed as heads of households, and nearly 90 percent of childless adult claimants were single; (6) the majority of EIC claimants were 25 to 44 years old; (7) in tax year 1994, 1.2 million EIC recipients also claimed $507 million in child and dependent care credits; (8) EIC recipients were more likely to file their returns electronically, use simpler IRS tax forms, and use a tax preparer to expedite refunds; (9) EIC recipients derived their income primarily from earnings rather than investment income; (10) in 1995, Congress enacted an indirect wealth test to eliminate EIC recipients with investment income over $2,350; (11) if the 1995 investment income threshold had been in place in tax year 1994, about 284,000 taxpayers would not have been able to claim EIC; (12) EIC is structured so that it phases out as income exceeds a certain level; and (13) about 60 percent of taxpayers with children who were heads of households or single had incomes in the phase-out range.