600 Income Security:Reduce Anti-Marriage Penalties in the Earned Income Tax Credit

Rationale:

The purpose of the EITC is to provide a refundable tax credit to low-income parents with children. To receive the credit, a person should have to be the actual custodial parent of the child. Non-custodial parents should not be eligible for the EITC. In the event of cohabiting, non-married parents should receive the credit based only on the mother’s income.

Erroneous overclaims equal between 29 percent and 38 percent of the dollar value of EITC claims. (( Internal Revenue Service, Compliance Estimates for the Earned Income Tax Credit Claimed on 2006–2008 Returns, Publication 5162
(8-2014), August 2014, p. 11. )) Refundable EITC payments in 2012 equaled some $52.6 billion; (( Internal Revenue Service, “SOI Tax Stats–Individual Statistical Tables by Size of Adjusted Gross Income, Individual Income Tax Returns with Earned Income Credit,” (accessed January 7, 2015). )) therefore the overclaim amount would be between $15 billion and $20 billion.

Roughly 20 percent of all EITC claims involve a qualifying-child error—cases in which the parent or the child or both are not eligible to receive the credit. (( Internal Revenue Service, Compliance Estimates for the Earned Income Tax Credit Claimed on 2006–2008 Returns, p. 21.))  About three-quarters of overclaims with qualifying-child errors involve false claims of residency. Many qualifying-child errors involve payments to relatives and non-custodial parents of the child, many of whom do not reside with the child. Restricting EITC eligibility and tightening residency documentation would reduce qualifying child errors and other unjustified payments.

Current qualifying child claim errors may cost taxpayers as much as $10 billion per year. We estimate savings could equal roughly 35 percent of the cost of qualifying child errors, or $3.5 billion per year.