By Kerri L. Tassin, J.D., CPA

This year, 2015, marks the 40th anniversary of the Earned Income Tax Credit. The earned income tax credit was first enacted as part of the Internal Revenue Code in 1975. Since that time, the credit has been expanded, analyzed and criticized, but it remains an important part of the tax return filing process for many working individuals and their families.

The Tax Reduction Act of 1975 first introduced the earned income credit to the Internal Revenue Code. At that time, the credit equaled 10 percent of earned income up to a maximum income of $4,000. This rule meant that the maximum credit for 1975 was $400. The credit was then phased out dollar for dollar for adjusted gross income amounts in excess of $4,000. The credit phased out completely for adjusted gross income amounts exceeding $8,000. The original earned income credit was also refundable, which meant that taxpayers could receive a refund check even if the credit exceeded the taxpayers’ total tax liabilities. For the tax year of 1975, only taxpayers with dependent children could take advantage of the credit.

According to Report of the House of Representatives Ways and Means Committee issued in February 1975, Congress intended that the earned income credit be offered as a way to offset the effect of Social Security taxes on low-income taxpayers. The credit applied to those individuals who earned income such as wages, salaries, tips, other employee compensation, and net earnings from self-employment. In order to take advantage of the credit, married taxpayers had to file jointly.

The earned income tax credit has undergone multiple revisions over the 40 years since it was first enacted. Congress made the earned income tax credit a permanent part of the Internal Revenue Code by enacting the Revenue Act of 1978. According to the General Explanation of the Revenue Act of 1978 prepared by the Joint Committee of Taxation, the earned income tax credit, “…has proven to be an effective way of providing tax relief for low-income families, while at the same time providing work incentives for these individuals.” In the 1978 Act, Congress also included a feature that allowed taxpayers to receive the credit in advanced payments throughout the year.

Further changes to the credit came during the 1980s and 1990s. Over the years, Congress increased the amount of the maximum earned income credit and the income phase-outs. In 1986, Congress concluded that the maximum credit amounts and phase-out amounts needed to be further increased to take into account the effects of inflation and increases in the Social Security tax. In addition, for the first time Congress made provision to index for inflation for the credit in future tax years. The Omnibus Budget Reconciliation Act of 1993 then made the credit available to certain taxpayers with no dependents.

For 2014, the maximum earned income credit for qualifying taxpayers with three or more qualifying children is $6,143. Taxpayers with two qualifying children may receive a maximum credit of $5,460, while taxpayers with one qualifying child may receive a maximum of $3,305. Qualifying taxpayers with no dependents may receive a maximum credit of $496 for 2014.

This article appeared in the May 30, 2015 issue of the Springfield News-Leader.  It is available online here.

Kerri Tassin, J.D., CPA, is director of the master of accountancy program in the School of Accountancy at Missouri State University. Tassin also is the director of the Volunteer Income Tax Assistance program and the director of the Low Income Tax Clinic at MSU. Email: kerritassin@missouristate.edu. The material in this article is for informational purposes only and does not constitute tax advice. Please consult with your own tax adviser regarding your personal tax situation.