Incentives Watch: California “Doubles Down” on State Earned Income Tax Credit


 

California Statehouse

The earned income tax credit (EITC), first enacted federally in 1975, has grown from humble beginnings to become a powerful tool in the government toolbox. Twenty-nine states and the District of Columbia have enacted their own EITC, many as a scaled-down version of the federal credit. The incentive has pulled millions out of poverty by not only encouraging work but providing a wage supplement through refundability, according to the Center on Budget and Policy Priorities. Wishing to build upon this success, California has expanded their state EITC, enacted as S.B. 855 and effective on June 27, by providing more money as well as widening the age range of eligible individuals. 

EITC: A Federal Primer

The federal EITC involves a somewhat complex calculation including earned income, credit percentages, and phase-out percentages. The calculation, found in I.R.C. § 32(a)(2), reads as follows:

“The amount of the credit allowable to a taxpayer under paragraph (1) for any taxable year shall not exceed the excess (if any) of

        ●the credit percentage of the earned income amount, over 

        ●the phaseout percentage of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds the phaseout amount.” 

Fortunately, the IRS provides tables and a worksheet so that individuals are not left to decipher Code provisions on their own. The rule is intended to phase in as income rises, plateau at a certain amount (i.e., for 2017, married individuals filing jointly with three children may earn a maximum credit of $6,318, earned by families making more than $14,000 and less than $23,930) and then phase out slowly (up to $53,930 of earned income for married individuals filing jointly with three children). 

A Californian Twist

California has expanded their EITC in three ways. First, the phase-out percentages for the alternative calculation were decreased by one-tenth of a percent, meaning a slower phase-out as incomes increase. Second, the phase-out amount for the alternative calculation was increased, widening the range of incomes that qualify for the maximum credit. Third, and perhaps most important, the age group qualifying for the credit was expanded from those ages 25 and 64 to all individuals over the age of 18. California is one of only a few states that provide their own credit with state-specific phase-out percentages and amounts, allowing the state to offer a state credit to those who do not qualify at the federal level. The legislation adds many eligible residents to what is already the largest state EITC credit program in the country with 3.1 million claimants in 2017. 

The EITC, both at the state and federal level has never been more valuable. California’s expansion is one example of the credit’s popularity nationwide. With no signs of slowing, individuals and practitioners across the country should remain abreast of the expansion or implementation of an EITC in a state near them. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How can the EITC be improved to deliver assistance to those in need while lowering financial and administrative burdens? 

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