Extending the EITC to Noncustodial Parents: Potential Impacts and Design Considerations. III. Noncustodial Parent EITC Policies

05/23/2009

Various approaches could be taken to constructing an NCP EITC.[3] The New York, D.C., and S. 1626 NCP EITCs all require the noncustodial parent to have paid all child support that accrued during the tax year.[4] Key differences among the credits include the eligible age range, the formula used to calculate the amount of the credit, and the income range in which the credit is available.[5] New York extends eligibility to all noncustodial parents age 18 and above, Washington, D.C. restricts eligibility to those age 18–30, and S. 1626 would restrict eligibility to those age 25–64 (the age range for the childless EITC).[6] S. 1626 would provide noncustodial parents in the income range of an expanded childless EITC with an amount equal to twice the amount of the credit available to adults without resident children. New York allows noncustodial parents to claim the greater of twice the existing federal childless EITC or two-thirds of the state EITC for a single taxpayer with one child. The District of Columbia relies solely on the District’s child-based EITC when determining the credit and income range for its NCP EITC. In other words, noncustodial parents who pay their full child support are eligible for the same credit that is available to families with resident children (based on the number of noncustodial children).

To estimate the effects of these different policy designs at the national level, we adjust the New York and D.C. policies to reflect the higher levels of the federal EITC.[7] Our New York–based policy sets the NCP EITC equal to two-thirds of the federal EITC for a single taxpayer with one child, and our D.C.-based policy sets the NCP EITC equal to the full federal child-based EITC.[8] We choose this approach because we wish to apply the principle underlying the New York and D.C. policies—that an NCP EITC should approach or match the levels of the child-based EITC—to the federal EITC. Except where noted, our S. 1626-based estimates show the impact of the NCP EITC relative to current law and do not capture the broader EITC expansions proposed by S. 1626, which include an expanded childless EITC and marriage penalty relief.

Figure 1 illustrates the NCP EITC credits simulated here. Like the EITC, the NCP EITC amounts simulated here would increase with earnings up to the point at which the maximum credit is reached, remain at this maximum level as earnings continue to increase, and then phase out based on earnings or adjusted gross income (AGI), whichever is higher. For purposes of comparison, figure 1 includes the childless EITC. In 2004 (the year of the data for our estimates), single taxpayers without resident children were eligible for a maximum credit of $390, and the credit was completely phased out at $11,490. Other than annual adjustments for inflation, there were no changes to the EITC between 2004 and 2008 that would affect the values for a single taxpayer shown in figure 1. Therefore, the values are equivalent to 2008 rules deflated to 2004 dollars.

EITC Credit for Single Filer by Earnings

Line graph showing credit amounts at different income levels for six different scenarios.

  • For Income $0 Childless EITC credit amount equals $0; for income $5,100, 390.15; for income 6390, 390.15; for income 11490, 0.
  • For Income $0 Twice the Childless EITC credit amount equals $0; for income $5,100, $780; for income $6,390, $780; for income $11,490, $0.
  • For Income $0 Twice expanded childless EITC (S.1626) credit amount equals $0; for income $5,866, $897; for income $11,733, $897; for income $17,599, $0.
  • For Income $0 2/3 EITC for 1 qualifying child (NY) credit amount equals $0; for income $7,660, $1,736; for income $14,040, $1,736; for income $30,338, $0.
  • For Income $0 EITC 2+ qualifying children (DC) credit amount equals $0; for income $10,750, $4,300; for income $14,040, $4,300; for income $34,458, $0.
  • For Income $0 EITC 1 qualifying child (DC) credit amount equals $0; for income $7,660, $2,604; for income $14,040, $2,604; for income $30,338, $0.

Notes: The 2004 values shown here are equivalent to 2008 values deflated to 2004 dollars. The EITC phases out with earnings or with adjusted gross income, whichever is larger.

 

Under our specifications, the D.C.-based scenario provides the most generous credit, followed by the New York–based scenario, and then the S. 1626-based scenario. Specifically, if the NCP EITC is equal to the full child-based EITC, then a noncustodial parent would receive a maximum credit of $2,604 (if one child—phasing out at $30,338) or $4,300 (if two or more children—phasing out at $34,458).[9] If the NCP EITC is set to two-thirds of the EITC for a single filer with one child, the taxpayer would receive a maximum credit of $1,736, and the phaseout would extend to $30,338. Under S. 1626, a noncustodial parent would receive a maximum of $897 in EITC benefits, and the phaseout would end at $17,599.[10]

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