Social Security and EITC: How They Are Related?

EITC Earned income tax credit calculations on the black page.
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With the Build Back Better plan stuck in Congress, the extended Earned Income Tax Credit is in jeopardy. Under the American Rescue Plan, the extended EITC gives the poorest working Americans a fully refundable tax credit of up to $1,502 — and lower-income Americans with two children much more.

A single working taxpayer with two children could receive an EITC of 40% of their earnings up to $5,980 of their salary. At that point, the credit phases out until their income reaches roughly $42,000, and then it disappears.

There are other rules that determine income limits and qualifications for the EITC.

  • The income limit for individual taxpayers with three or more qualifying children is $50,954 ($56,844 for married, filing jointly)
  • The income limit for individual taxpayers with two qualifying children is $47,440 ($53,330 for married, filing jointly)
  • The income limit for individual taxpayers with one qualifying child is $41,756 ($47,646 for married, filing jointly)
  • You can’t claim the credit it if you are married, filing singly
  • You must have investment income less than $3,649.99
  • You must have a valid social security number
  • You must be 25 or older, but under age 65
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Without the BBB plan that would extend many of the stimulus benefits put in place by the American Rescue Plan, the EITC would drop back down to $543 for single taxpayers with no children, and other amounts would drop similarly.

What many people don’t realize is that the EITC is nothing new. It was introduced in 1975 as part of an economic stimulus package, extended multiple times, and made permanent in 1978, according to Forbes.

Back in the mid-70s when it was introduced, the EITC was designed to offset the amount of money deducted from paychecks as part of employer and employee Social Security taxes, Forbes said. At the time, the FICA tax rate was 5.85% each for the employer and employee, while the credit returned 10% of the first $4,000 in income. That $4,000 is equal to roughly $26,000 today, Forbes reports.

Since it was never a direct relationship or formula to calculate the EITC based on Social Security taxes, this history has been (mostly) forgotten. Tax credit amounts have increased over the years, and benefits for childless taxpayers introduced, but the credit does not directly correlate with FICA withholding tax.  Should the history of the tax credit play any bearing in whether the EIC is extended or not?

Certainly, it’s something for lawmakers to consider, especially if you think about the EITC as a regressive tax, which means the tax is capped for the highest wage earners. Eliminating the tax cap while maintaining the extended EITC would place a larger Social Security tax burden on higher wage earners and, potentially, help solve Social Security’s looming funding problem. 

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Regardless of whether you think about the EITC as “tied” to Social Security funding or not, it’s important to keep in mind the role that programs like the expanded, advance Child Tax Credit and the increased EITC have helped the lowest-income taxpayers, reducing poverty in the U.S. at a time when many people are struggling.

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