Economic Snapshot | Budget, Taxes, and Public Investment

Tax credits for working families

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Snapshot for June 7, 2000

Tax credits for working families
A recent EPI Briefing Paper, Giving Tax Credit Where Credit Is Due, describes the design of a new tax credit — the Universal Unified Child Credit (UUCC) — that simplifies the individual income tax by merging the Earned Income Tax Credit, the dependent exemption, and the child credit. The new credit would provide tax relief to working families with children.

If you have access to the Microsoft Excel spreadsheet program (Excel 97 or higher), you can estimate the tax cut you would receive if the UUCC was enacted into law as a reform of the federal individual income tax. Once you have downloaded the spreadsheet (read below), you just need to fill in three boxes on the spreadsheet: your total income, your filing status, and the number of children you claim as dependents. [1]

You can get a more precise estimate of the effect of the UUCC on your own taxes by using the “adjusted gross income” from your tax return in the first box for total income on the spreadsheet. Note, however, that presently the EITC is limited to those taxpayers with low levels of interest and dividend income. If the UUCC is enacted into law, these levels will be raised to accommodate most working families with children. [2]

Here are some examples of how to use the spreadsheet and the tax savings under the UUCC proposal:

1) Take for instance a married couple with a combined income of $40,000 and two children. On the spreadsheet, fill in 40,000 for income, the letter “m” for married filing jointly, and the number “2” in the box for number of children. Under present law, this family would be ineligible for the EITC and would owe $2,270 in income taxes. Under the UUCC, the income tax would be $4,095, but the family would receive a credit of $3,246, for a tax savings of $1,421 over the current tax system.

2) A single mom with two children and an income of $35,000 is not eligible for the EITC. Her income tax under current law is $2,060. Under the UUCC her income tax would be $3,885, but after subtracting the credit of $3,521, her net tax liability would be reduced to $364, for a savings of $1,696 in taxes.

3) What about marriage penalties? Although the UUCC does not eliminate marriage penalties, it does reduce them significantly. Take a single woman earning $14,000 annually with one child and a single man earning $20,000 with no children. When they file taxes separately, the woman owes no income tax and is eligible for an EITC credit of $2,071; the man, however, owes $1,934 in income tax. Now suppose they marry. Under current law, when they combine their income and file as a married couple, their total tax liability is $2,283, with no EITC eligibility. In effect their marriage creates a tax penalty because when they were unmarried, their combined taxes totaled $137. But when they get married, their tax burden skyrockets to $2,283. The virtues of the UUCC relative to current law in this case are:

  • the combined tax of the man and woman when they are unmarried is lower — a $322 credit under UUCC versus a $137 credit under current law;
  • their combined tax after marriage is lower — $1,154 versus $2,283;
  • the marriage penalty under the UUCC is lower — $1,476 versus $2,146.

Click here to download the spreadsheet.

[1] Do not fill in other cells in this spreadsheet because you will overwrite the formulas and the program will not work. Note also that a single person with children files as “head of household,” not “single.” Single filing status is for persons with no dependents. The program automatically figures your standard deduction. If you itemize deductions, you can simply fill in the box where your standard deduction appears, but if you do this, make an extra copy of the spreadsheet first, since you will erase the formula for determining your standard deduction. [RETURN TO TEXT]

[2] It should be noted that this spreadsheet program grossly simplifies the tax code, so using it to figure out your taxes for filing purposes is expressly not recommended. Another limitation is that the program will not work for high-income families, although the UUCC would provide tax cuts to many of these families. Also, if you have more than 10 children, the program cannot figure out your UUCC. [RETURN TO TEXT]

Note: This spreadsheet has not been tested in Lotus or Quattro Pro, but if you are familiar with these programs you should be able to modify it so that it works with these applications. No macros are used. All comments on the spreadsheet program are welcome. Please direct questions and comments about this week’s Snapshot to Max Sawicky.

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