ACCT 401 Week 3 Group Discussion Board Forum 2 Example

Group Discussion Board Forum 2: The Earned Income Tax Credit

ACCT 401 Individual Taxation, Group Discussion Board Forum 2

Thread by [Student Name]

The taxpayer and the classmates are composites; the 2025 credit amounts come from IRS Revenue Procedure 2024-40, and the textbook, Scripture and research cited are real.

Jasmine is a head of household with two qualifying children who earned $24,000 in wages in 2025. For two children, the credit phases in at 40% of earnings up to $17,880, reaches a maximum of $7,152 and begins to phase out at 21.06% of earnings above $23,350 for filers other than joint filers (Internal Revenue Service, 2024). Her credit is therefore about $7,152 less 21.06% of the $650 by which $24,000 exceeds $23,350, or $7,015. Because the credit is refundable, she receives it even though her income tax liability is zero. Now suppose she is promoted and earns $29,000. Her credit falls to about $7,152 less 21.06% of $5,650, or $5,962. The raise added $5,000 of wages but cost her about $1,053 of credit, and payroll taxes take another 7.65% of the raise. My answer to the prompt is that the EITC achieves its central purpose, rewarding work among low-income families, but that its phase-out imposes a marginal rate on those same workers that policymakers rarely acknowledge.

Spilker et al. (2018) explain that credits reduce tax dollar for dollar, unlike deductions, whose value depends on the taxpayer's marginal rate, and that refundable credits can produce payments larger than the tax owed. The EITC applies only to earned income and is limited by investment income, so it is designed to subsidize work rather than income in general. That design is the reason it is usually evaluated by its effect on employment. Its value also rises with the number of qualifying children, so the qualifying child tests in our chapters, relationship, age, residency and joint return, determine not only filing status but also the size of the credit. A single worker with no children receives a maximum of only $649 for 2025, which is why the debate over the credit is largely a debate about working parents.

The evidence on employment is strong. Eissa and Liebman (1996) studied the expansion of the credit in the Tax Reform Act of 1986 and found that it increased labor force participation among single women with children relative to single women without children, while finding no significant reduction in hours among women already working. Hoynes and Patel (2018) examined later expansions and found that larger credits raised employment among single mothers and increased after-tax income, with the gains concentrated among families near and below the poverty line. The credit pays people to start working far more than it penalizes them for working more. The phase-out penalty is real, but the research suggests it changes hours less than the phase-in changes the decision to work at all.

Scripture repeatedly ties justice to fair treatment of workers. Paul writes that the laborer deserves his wages (1 Timothy 5:18), and James condemns withholding the wages of those who mow the fields (James 5:4; English Standard Version Bible, 2001/2016). A credit that raises the after-tax reward of work for the lowest-paid fits that concern. For tax professionals, it also carries a duty: many eligible workers never claim the credit, and those who do often rely on preparers, so preparing these returns accurately and charging fairly for it is part of serving the neighbor.

Reply to Brianna

Brianna, you raised the EITC's high rate of improper payments as a reason to cut the credit, and the concern is legitimate, because improper payments cost every taxpayer. Your thread was right to ask how much of the credit reaches people who are not eligible. The IRS consistently reports that a substantial share of EITC payments are made in error. The question is what causes those errors. Many arise from the complexity of the qualifying child rules covered in our chapters: a child must meet the relationship, age, residency and joint return tests, and when parents are separated or a grandparent helps raise a child, more than one adult may reasonably believe they qualify. Those errors look different from fraud and call for a different remedy. If the credit were cut, families who claim it correctly would bear the loss, and Hoynes and Patel (2018) found that the credit's employment and income effects are largest for exactly those families. A better approach would simplify the residency and relationship tests or use the information the IRS already holds, such as dependent claims on prior returns, to flag likely errors before refunds are issued. Paid preparers also carry responsibility here, since they must meet due diligence requirements when they prepare EITC claims. Since the PATH Act, the IRS also holds EITC refunds until mid-February so it can match wages to employer reports, a reminder that verification can work without cutting the credit. Accuracy and generosity do not have to compete; the rules can be made clearer so that eligible workers can claim the credit correctly.

Reply to Caleb

Caleb, you proposed paying the EITC monthly instead of as a lump sum at tax time, so that families would not face the spike in marginal rates and refunds once a year. That idea has a history: an advance payment option once existed, and very few eligible workers used it before it was repealed. Congress ended the advance option after 2010, citing low participation and compliance problems with advance payments that later had to be repaid. Part of the reason may be that many families prefer the lump sum. Spilker et al. (2018) point out that refundable credits are reconciled on the annual return, which means an advance paid during the year can turn into a balance due if income or household circumstances change, and families on tight budgets fear that repayment. Eissa and Liebman (1996) measured the credit's effect on entering work under the annual lump-sum design, so the evidence we have describes that design, and we do not know whether monthly payments would preserve the same effect. Your idea may still help some families, for instance a parent facing a large expense in the middle of the year. Research on how families spend their refunds could help settle the question, because if most of the lump sum goes to paying down debt or catching up on bills, a monthly payment might actually prevent that debt from building up. A voluntary partial advance with protection from repayment for small errors would preserve the lump sum for those who want it while helping those who need cash sooner. That compromise would answer your concern while keeping the design the research actually evaluated.

References

Eissa, N., & Liebman, J. B. (1996). Labor supply response to the earned income tax credit. The Quarterly Journal of Economics, 111(2), 605-637. https://doi.org/10.2307/2946689

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Hoynes, H. W., & Patel, A. J. (2018). Effective policy for reducing poverty and inequality? The earned income tax credit and the distribution of income. Journal of Human Resources, 53(4), 859-890. https://doi.org/10.3368/jhr.53.4.1115.7494R1

Internal Revenue Service. (2024). Revenue Procedure 2024-40. U.S. Department of the Treasury. https://www.irs.gov/pub/irs-drop/rp-24-40.pdf

Spilker, B. C., Ayers, B. C., Barrick, J. A., Lewis, T. K., Robinson, J. R., Weaver, C. D., Worsham, R. G., & Outslay, E. (2018). Taxation of individuals and business entities (Custom ed.). McGraw-Hill Education.