Extending the EITC to Noncustodial Parents: Potential Impacts and Design Considerations. D. NCP EITC and Tax Intercepts

05/23/2009

Part of the rationale for the EITC is to encourage low-wage work and the payment of child support by increasing the amount of income that low-wage noncustodial parents are able to retain. However, if the NCP EITC is intercepted to pay child support arrears, then this incentive will be reduced. State and federal tax systems typically intercept tax refunds owed to noncustodial parents who have child support arrears and either forward the refund to the custodial family or return it to the government in order to repay child support that has been “assigned” by the custodial parent to the government as a condition for receiving welfare assistance.[27] Unless federal or state policies specifically exempt the NCP EITC from the tax intercept or the credit is only available to noncustodial parents without arrears, then some amount would be intercepted to repay arrears.

If a noncustodial parent is aware that the NCP EITC will be intercepted, then he or she may have little incentive to increase work effort or child support payments in order to qualify for the credit. This is particularly true if the intercepted credit would go to the government rather than to the custodial family. However, for noncustodial parents who pay child support, an intercepted NCP EITC would reduce the arrears owed. For noncustodial parents with low or moderate arrears, the intercepted NCP EITC could eventually repay the child support arrears owed to the government and custodial family, and the noncustodial parent would begin to receive the financial benefits of the credit. The intercepted credit could even help a noncustodial parent become eligible for the credit in the next year, if it is counted as a child support “payment” when determining eligibility for the next year’s NCP EITC.

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