Biden's boost to the earned income tax credit may trigger a 'marriage penalty'

Federal stimulus and enhanced tax credits have provided benefits to millions of Americans. However, some low-income workers may not receive a boost.

The earned income tax credit, known as the EITC or EIC, offers a write-off for low- and moderate-income families. To qualify, taxpayers must have earned income — wages and payments other than investments — and the credit may increase with eligible children. 

Workers may receive a credit based on a percentage of earnings, and it’s refundable, meaning it cuts their tax bill or provides a refund, even if it’s larger than levies owed. The Internal Revenue Service has a tool to see who qualifies.

Previously, workers without children received little support from the EITC. However, the American Rescue Plan boosted the tax break through 2021 and expanded eligibility to cover more taxpayers without kids.

A worker without children may receive up to $1,502 in 2021, nearly triple the former benefit, and President Joe Biden proposed making the changes permanent in the American Families Plan.  

If that happens the enhanced EITC would provide $12.4 billion to families in 2022, benefiting 19.5 million workers, according to research from the Institute on Taxation and Economic Policy.  

The downside: There’s a sharp income phaseout that causes a so-called “marriage penalty” for some couples, said Eugene Steuerle, co-founder of the Urban-Brookings Tax Policy Center.

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That’s because single filers without children may be eligible with earned income below $21,430. However, spouses without children filing together must earn less than $27,380, making it more difficult to qualify.

For example, if a worker makes $20,000 and their spouse brings in another $10,000, they may lose some of the enhanced credit.

Moreover, a childless worker marrying someone with a kid may eliminate the benefit. It may also reduce what their spouse with a child would have received if they were single.

While Biden also enhanced another benefit, the child tax credit for 2021, the phaseouts for that maximum credit are significantly higher, at $150,000 for married couples filing jointly, Steuerle said.

“A low earner joining another low earner wouldn’t face that penalty,” he said.

“It really puts people in high cost of living states at a big disadvantage,” said Dan Herron, a San Luis Obispo, California-based certified financial planner and certified public accountant with Elemental Wealth Advisors.

Low-income couples in costly states may phase out of the EITC more quickly than less expensive areas, he said. 

However, those on the edge of the thresholds — whether they have children or not — may explore ways to lower their adjusted gross income, such as contributing to a 401(k) retirement plan or health savings account, provided they have enough cash flow, Herron said.  

“The bottom line is low earners who marry other low earners are largely penalized by the EITC,” said Steuerle. “But that’s actually a reflection of the way they often get penalized in the broader social welfare system.”