This Tax Credit Enhancement for Lower Earners Could Stick Around Another Year

This could be good news for a lot of families.

Democratic lawmakers have been hard at work mapping out legislation for their $1.75 trillion Build Back Better plan. Now, they're proposing a one-year extension to the enhanced version of the Earned Income Tax Credit (EITC), a credit designed to help lower earners.

The EITC is a lifeline for households in need

When the American Rescue Plan was passed back in March 2021, it boosted a couple of key tax credits for the 2021 tax year. The first, and perhaps more well-known, was the Child Tax Credit. Not only did the value of the credit increase, but the process of distributing funds via the credit changed so that monthly installments have been hitting Americans' bank accounts since July.

The EITC also got a boost under the American Rescue Plan. That boost almost tripled the value of the credit for eligible recipients without dependents. It also raised the earnings limit so more people were able to qualify for the credit this year.

Now, lawmakers are fighting to keep that enhancement in place for another year. If they are successful, it could impact 17 million low-wage workers.

A particularly valuable credit

What makes the EITC so valuable is that it's fully refundable. Most tax credits aren't refundable, which means the most they can do is reduce one's tax liability to $0.

Say someone files taxes and claims a non-refundable $1,000 credit. If that person owes the IRS nothing, they get nothing. If they owe the IRS $400, they get $600, not the full $1,000 value of the credit.

The EITC has always been a fully refundable credit -- that was the case before the American Rescue Plan enhanced it and opened it up to more people. If that enhancement stays in effect for another year, it could help many households better recover from the pandemic and shore up their finances in the process.

Incidentally, lawmakers are also looking to make the fully refundable nature of the Child Tax Credit permanent. This year, the credit is permanently refundable, but it's normally only partially refundable, which means some recipients can't claim its full value.

Aid for those who need and deserve it

Given that there are currently no plans in the works for a fourth stimulus check to go out, keeping the boosted EITC in place through 2022 could help a lot of families get closer to attaining financial security. The pandemic has made it clear just how much we, as a society, rely on essential workers. Yet it's essential workers who are often paid lower wages that make it difficult to cover the bills.

The fact that the enhanced EITC could stick around another year is also important given that households without children are not eligible for the Child Tax Credit. Even once the Child Tax Credit reverts to its former non-boosted state, it still has a maximum value of $2,000 per child. Making the EITC available to more people without children is especially crucial in the absence of another stimulus check.