As many people who follow the news and politics are aware, Congress and President Obama are in the first rounds of negotiations and proposals for a tax code overhaul. As we discussed in a previous post, there are many unresolved issues in the tax code that need to be addressed, particularly in the area of tax breaks for low income families and small business owners (among others). One area of contention is the Earned Income Tax Credit, which provides a tax credit for people who earn less than $14,790 per year. This tax credit along with the Child Tax Credit currently applies to 32 million families nationwide.

At the present time, the tax credit is available mainly for the working poor who have children and offers a maximum refund of $503 per year. In addition to adding eligible taxpayers who do not have children, the proposal also includes more workers by widening the age range by several years on either side and by increasing the income cap for claiming the credit.

In Georgia alone about 483,000 workers would benefit by paying fewer taxes under the proposal. Nationwide about 13 million people would be added to the program.

One of the major arguments in favor of this tax credit is that it helps incentivize workers in relatively low-paying jobs to remain in the workforce by allowing them to keep more of their income. Taxing them at a higher level would alter the economics of continuing to work and could make it more economically sensible for some families to rely on government assistance instead.

While the overall concept and parts of the proposal have been supported by members of both major political parties, the ultimate fate of the proposal is still very uncertain. However, this is an important issue for many to take into account when they are making their financial and tax planning decisions for the upcoming years.

Source: Washington Post, “White House: Earned income tax credit could help 13.5 million,” Reid Wilson, March 4, 2014.