How does the earned income credit produce a negative income tax?

Answer 1

As a refundable credit, the Earned Income Credit allows some loer income taxpayers to get a "refund" for more than they paid in to the system. In other words, if I made $14,000, am single with two children who live with me, and had no other income, I could have had, say, $900 in income tax withheld (making up figures, don't give me crap about it). I could then be looking at a refund of up to $5400, give or take a thousand or so. There's about $4500 in Earned Income Credit, but there could also be some Additional Child Tax Credit, besides what you actually had withheld from your check. Brilliant, don't you think?!?!(yea, not really)

Answer 2

It is not a negative income tax but the difference is subtle. With Earned Income Credit, the government gives you more money than you owe in income tax and at the top levels, more than you owe in Social Security tax.

Answer 3

The EIC is a refundable credit, meaning that it can reduce your tax liability to less than zero. If it does, the balance is paid to you, thereby creating a "negative" income tax.

Not everyone who qualifies for the EIC will have it reduce their tax liability to less than $0 (for example, someone whose income is near the upper limit for the EIC) so it's not a negative item for all taxpayers.

Answer 4

Because some people who qualify for EIC pay no tax, and instead get a check from the Treasury.