How Does The Earned Income Tax Credit Work?

Have you ever asked yourself, how does the income tax credit work? The earned income tax credit works by encouraging low and poverty stricken people to work. It is targeted to help young working families who are struggling to make ends meet. Individuals can also benefit from the earned income tax credit if they make below the specified standards set by the Internal Revenue System each year. An eligible child increases the threshold of the amount and a second child increases the amount again.

The refundable credit was set up to refund the Social Security withholding tax from the employee’s paychecks. Employees would still receive the credit towards future benefits, yet, would have access to the money while they were raising their families.

Employees who qualify for the Earned Income Tax Credit could also apply to have the credit added to their checks during the year. This meant the employees could see their paycheck increase by about $20 per week.

Most recipients of the Earned Income Tax Credit file for the credit when they fill out their income taxes each year. The credit can be used to pay any income tax that is due with any remaining balance refunded to the tax payer. This has help families to get a large sum of money that they can use for down payments on cars or to help pay off existing debt.

However, there have been some drawbacks to the Earned Income Tax Credit. It has actually hindered the institute of marriage. When a couple with two children files a joint income tax return, the credit is lower due to the fact the couple both had earned income. This increased the amount of their earned income, thus lowered the amount of the credit they were eligible for. Couples have found it advantageous to actually divorce, and then each claims a child and files as Head of Household. Thus, they receive more of the credit than they did when they were married.

Changes are being discussed in the legislature to eliminate the Earned Income Tax Credit. One possibility is to not collect any Social Security tax on the first $10,000 of earned income each year. This would offset the need for the Earned Income Tax Credit.

The Earned Income Tax Credit has been proclaimed to be one of the largest anti-poverty programs in the United States today.

show comments

What Others Are Reading Right Now.