Earned Income Credit

This report provides information on participation in the Earned Income Credit (EIC), a refundable tax credit available to low-income, working taxpayers, over a five-year period. GAO analyzes, for tax years 1990 through 1994, EIC claimants' patterns of claiming the credit, changes in their income in the years following an EIC claim, and their income and filing status after leaving the EIC. GAO also estimates the number of EIC claimants in 1994 for families with children who would and would not have been eligible for the credit in 1994 if the 1990 maximum income limit was still in effect.

GAO noted that: (1) from tax year 1990 through tax year 1994, 27.3 million taxpayers claimed the EIC for families with children, at least once; (2) they made a total of 69 million claims totaling $73 billion (in 1996 dollars); (3) about two-thirds of these taxpayers claimed the credit at least twice during the 5-year period, and about half claimed it in 3 or more of the 5 years; (4) (5) most EIC claimants, on average, took the credit at least one more time; (6) not only did most taxpayers who claimed the EIC do so more than once, but many took the credit several years in a row; (7) on average, about half of the claimants in a year took the credit in each of the next 2 years; (8) Congress designed the EIC, in part, as an incentive for low-income for low-income taxpayers to find and keep jobs rather than relying on welfare; (9) most EIC claimants continued to file a return over the 4 years following a claim, 91 percent filed a return in the first year, and 82 percent did so in the fourth year; (10) on average, in the first and fourth years after a claim, respectively, 25 and 36 percent of claimants reported higher income while 21 percent and 29 percent reported lower income or did not file a return; (11) when GAO tracked taxpayers who at some point stopped claiming the EIC, GAO found that most filed a return in the first and second consecutive years of not claiming the credit the EIC, almost equal proportions reported income within the EIC range and above the EIC limit; (12) among taxpayers in their first year not claiming the EIC, almost equal proportions reported income within the the EIC range and above the EIC limit; (13) among taxpayers in a second consecutive year not claiming the credit, the proportion of those reporting income above the EIC limit increased; (14) about 40 percent of taxpayers who filed a return in the first year that stopped claiming the EIC also reported a change in filing status, predominantly from head of household status to single or married filing jointly; (15) to qualify for the EIC in tax year 1990, taxpayers needed to have at least one qualifying child and reported income less than $23,750 (in 1994 dollars); (16) if this maximum income limit would have applied in tax year 1994, about 2 percent of 1994 claimants of the EIC for families with children would not have been able to claim the credit because of income above the eligibility threshold; and (17) these taxpayers claimed about $48 million in EIC in 1994, or about 0.2 percent of the total EIC for families with children that year.