Earned Income Credit: Profile of Tax Year 1994 Credit Recipients
(Briefing Report, 06/13/96, GAO/GGD-96-122BR).

Total Earned Income Credit (EIC) program costs have risen dramatically
in recent years as Congress has extended EIC coverage and increased
credit rates. From tax year 1990 to tax year 1994, EIC program costs (in
1994 dollars) increased by about 150 percent. During that same period,
the number of EIC recipients increased by about 50 percent. Much of the
recent growth in the number of taxpayers claiming the EIC can be
attributed to the extension of the credit to childless adults beginning
in tax year 1994. About 15 million families with children received $20.5
billion of EIC in tax year 1994; another four million childless adults
received an additional $0.7 billion. The refundable portion of the EIC
for tax year 1994 was $16.7 billion, or 79 percent of the total EIC.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-122BR
     TITLE:  Earned Income Credit: Profile of Tax Year 1994 Credit 
             Recipients
      DATE:  06/13/96
   SUBJECT:  Tax credit
             Tax administration
             Dependents
             Disadvantaged persons
             Eligibility criteria
             Taxpayers
IDENTIFIER:  Earned Income Tax Credit
             
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Cover
================================================================ COVER


Briefing Report to the Chairman, Committee on Finance,
U.S.  Senate

June 1996

EARNED INCOME CREDIT - PROFILE OF
TAX YEAR 1994 CREDIT RECIPIENTS

GAO/GGD-96-122BR

Earned Income Credit

(268727)


Abbreviations
=============================================================== ABBREV

  AGI - Adjusted Gross Income
  CPI-U - consumer price index for all urban consumers
  EIC - Earned Income Credit
  IRS - Internal Revenue Service
  OBRA - Omnibus Budget Reconciliation Act
  SOI - Statistics of Income

Letter
=============================================================== LETTER


B-271959

June 13, 1996

The Honorable William V.  Roth, Jr.
Chairman, Committee on Finance
United States Senate

Dear Mr.  Chairman: 

This report, which follows our briefing to you, is the latest in a
series of reports and testimonies responding to your interest in the
Earned Income Credit (EIC).\1

The report presents information on participation in the EIC program
for tax years 1990 through 1994 and the characteristics of taxpayers
who received the EIC in tax year 1994. 


--------------------
\1 Previous work on the EIC includes Earned Income Credit: 
Noncompliance and Potential Eligibility Revisions (GAO/T-GGD-95-179,
June 8, 1995); Earned Income Credit:  Targeting to the Working Poor
(GAO/GGD-95-122BR, Mar.  31, 1995) and the related testimony Earned
Income Credit:  Targeting to the Working Poor (GAO/T-GGD-95-136, Apr. 
4, 1995); Tax Administration:  Earned Income Credit--Data on
Noncompliance and Illegal Alien Recipients (GAO/GGD-95-27, Oct.  25,
1994); and Tax Policy:  Earned Income Tax Credit:  Design and
Administration Could Be Improved (GAO/GGD-93-145, Sept.  24, 1993). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Total EIC program costs have increased dramatically in recent years
as Congress has extended EIC coverage and increased credit rates. 
From tax year 1990 to tax year 1994, EIC program costs (in 1994
dollars\2 ) increased by about 150 percent--from $8.6 billion to
$21.2 billion.  During that same period, the number of EIC recipients
increased by about 50 percent--from 12.6 million in tax year 1990 to
19.1 million in tax year 1994.  Much of the recent growth in the
number of taxpayers claiming the EIC can be attributed to the
extension of the credit to certain childless adults\3 beginning in
tax year 1994.  About 15 million families with children received
$20.5 billion of EIC in tax year 1994; another 4 million childless
adults received an additional $0.7 billion.  The refundable portion
of the EIC for tax year 1994 was $16.7 billion, or 79 percent of the
total EIC.\4

Our profile of taxpayers who received the EIC in tax year 1994 showed
the following: 

  -- The majority of taxpayers claiming the credit for families with
     children filed as head of household, while almost 90 percent of
     taxpayers claiming the credit for childless adults were single. 
     The majority of filers in both groups were age 25 to 44. 

  -- EIC recipients were far more likely to file their returns
     electronically than were taxpayers not claiming the EIC. 
     Twenty-six percent of EIC returns were filed electronically
     compared to 7 percent of non-EIC returns.  Although 65 percent
     of EIC recipients used IRS' simpler forms, the 1040EZ and 1040A,
     50 percent of the EIC filers used a paid preparer rather than
     completing the forms themselves.  Some of the filers who used a
     paid preparer may have done so not because they needed help
     preparing their returns but simply as a means to file their
     returns electronically and thus expedite their refunds. 

  -- The EIC is intended for low-income workers, most of whose income
     would come from earnings rather than investment income.  As
     expected, wages and self-employment income accounted for nearly
     all of EIC recipients' total income before adjustments.  Eleven
     percent of recipients reported income from unemployment
     compensation.  Although 3.9 million EIC recipients (21 percent
     of all recipients) reported taxable interest, 60 percent of them
     reported less than $100, and 86 percent reported less than $500. 

  -- In 1995, Congress enacted an indirect wealth test to eliminate
     taxpayers with investment income\5 over $2,350 from the EIC
     program.  To estimate the impact of this provision, we deflated
     the investment income threshold to 1994 dollars and applied it
     to tax year 1994 EIC recipient data.  Had the investment income
     threshold been in place in tax year 1994, about 284,000
     taxpayers who claimed $212 million of EIC would not have been
     able to do so. 

  -- The EIC is structured so that the credit phases in as income
     rises, plateaus, then phases out as income exceeds a certain
     amount.  About 60 percent of taxpayers receiving the EIC for
     families with children had incomes in the phase-out range of the
     credit. 


--------------------
\2 To index dollar values to constant 1994 dollars, we used the
Bureau of Labor Statistics' consumer price index for all urban
consumers (CPI-U), as published in the Economic Report of the
President, Feb.  1996. 

\3 The credit was extended in tax year 1994 to low-income working
taxpayers who do not have a child meeting the criteria for an EIC
qualifying child.  In fact, these taxpayers may be non-custodial
parents or may live with a child who, for some reason, cannot be
claimed as an EIC qualifying child.  Throughout the report, however,
we refer to this new group of EIC recipients as "childless adults" as
a simple means to distinguish them from EIC recipients who have one
or more qualifying children.  We refer to this latter group as "EIC
families with children."

\4 The refundable EIC amount comes from Statistics of Income (SOI)
data and may differ from actual EIC outlays (refunds) reported from
the Internal Revenue Service's (IRS) accounting system.  The SOI data
are reported by tax year, and IRS outlays are reported by fiscal
year.  In addition, IRS examinations and other actions may make the
actual EIC refunded different from refund amounts reported on
taxpayers' returns.  The President's fiscal year 1997 budget shows
actual fiscal year 1995 EIC outlays totalling $15.2 billion (most of
which would apply to tax year 1994 returns filed in 1995). 

\5 Investment income includes taxable and nontaxable interest,
taxable dividends, and net rents and royalties derived from sources
outside the taxpayer's ordinary course of trade or business. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The EIC is a refundable tax credit available to low-income working
taxpayers.  Congress established the EIC in 1975 to achieve two
long-term objectives:  (1) to offset the impact of Social Security
taxes on low-income workers with families and (2) to encourage
low-income individuals with families to seek employment rather than
welfare.  Provisions included in the Omnibus Budget Reconciliation
Act (OBRA) of 1993 extended the EIC to certain childless adults
beginning with tax year 1994. 

A taxpayer's eligibility for the EIC depends on the number of
qualifying children who meet the age, relationship, and residency
tests and the taxpayer's earned income or, in some cases, adjusted
gross income (AGI).  Maximum earned income or AGI for tax year 1994
was $8,999 for taxpayers with no qualifying children, $23,754 for
taxpayers with one qualifying child, and $25,295 for taxpayers with
two or more qualifying children.  In addition, taxpayers with no
qualifying children had to be at least 25 but less than 65 years old. 

OBRA of 1993 also increased, over a period of 3 years, the maximum
credit amounts available to families with children.  To better target
the EIC to the working poor, Public Law 104-7, enacted in 1995, adds
another EIC eligibility test based on investment income.  Beginning
in tax year 1996, taxpayers with investment income over $2,350 will
no longer be eligible for the EIC, regardless of their earned income. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to provide data on (1) trends in EIC costs and
participation for tax years 1990 through 1994, (2) characteristics of
tax year 1994 EIC recipients, and (3) characteristics of recipients
with income in the credit phase-out range who claimed the credit for
families with children. 

To summarize data on EIC recipients, we obtained and analyzed IRS'
SOI databases for tax years 1990 through 1994.\6 Each SOI database
contains tax return information for a stratified, random sample of
taxpayers.  All of the EIC participation, cost, and profile data in
this briefing report are estimates based on the SOI samples.\7

We did our work from October 1995 through May 1996 in accordance with
generally accepted government auditing standards. 

We requested comments on a draft of this report from officials at IRS
and the Department of the Treasury.  Written comments from IRS and
oral comments from Treasury were technical in nature and involved
definitional issues.  We made changes to the report and the
underlying analyses where appropriate. 


--------------------
\6 The database we used for tax year 1994 is SOI's advance file, the
most recent available.  The database includes the complete sample of
1994 tax returns filed from January to late September 1995.  The
sample is weighted to represent a full year of taxpayer reporting. 

\7 Because the data we report are estimates, we calculated confidence
intervals at the 95-percent confidence level.  In most cases, the
confidence intervals were within +/- 10 percent of the reported
values.  Confidence intervals exceeding that amount are noted. 


---------------------------------------------------------- Letter :3.1

As agreed with your office, unless you publicly release its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies to
interested congressional committees, the Secretary of the Treasury,
the Commissioner of Internal Revenue, and other interested parties. 
We will also make copies available to others on request. 

Major contributors to this report are listed in the appendix.  Please
contact me on (202) 512-5594 if you have any questions. 

Sincerely yours,

James R.  White
Associate Director, Tax Policy
and Administration Issues


Briefing Section I INTRODUCTION
============================================================== Letter 


   OBJECTIVES
------------------------------------------------------------ Letter :4



   (See figure in printed
   edition.)


   BASIC STRUCTURE OF THE EIC
------------------------------------------------------------ Letter :5



   (See figure in printed
   edition.)

   Source:  Congressional Research
   Service.

   (See figure in printed
   edition.)


   CHANGES IN THE EIC FOR TAX YEAR
   1994
------------------------------------------------------------ Letter :6



   (See figure in printed
   edition.)

   Source:  Congressional Research
   Service.

   (See figure in printed
   edition.)


      EIC STRUCTURE AND
      ELIGIBILITY CHANGED IN TAX
      YEARS 1991 AND 1994
---------------------------------------------------------- Letter :6.1

The EIC was originally established as a work bonus designed to offset
payroll taxes and was not designed to vary by family size; the
taxpayer merely had to have at least one qualifying child.\1 In the
1990 Omnibus Budget Reconciliation Act (OBRA), however, Congress
adjusted the credit structure to grant different credit amounts to
taxpayers with one qualifying child and taxpayers with two or more
qualifying children.  OBRA of 1990 also added two supplemental
credits--one going to taxpayers with a child under 1 year of age and
another to taxpayers who paid health insurance premiums on policies
covering their children.  These changes, in addition to a general
increase in credit rates, took effect in tax year 1991.\2

OBRA of 1993 made two changes in the credit's structure that took
effect in tax year 1994.  First, to simplify EIC filing, the act
repealed the supplemental young child and health insurance credits. 
Second, the act expanded EIC eligibility to include certain taxpayers
without a qualifying child.  To receive the EIC for childless adults,
taxpayers (1) must be at least 25 but less than 65 years old, (2)
must have income of less than $9,000, and (3) cannot be claimed as a
dependent on another return.  OBRA of 1993 also increased, over a
3-year period beginning in tax year 1994, the maximum credit amounts
for families with children. 


--------------------
\1 A qualifying child (1) is an EIC claimant's son, daughter, adopted
child, grandchild, stepchild, or foster child; (2) is under age 19,
or under age 24 and a full-time student, or any age and permanently
and totally disabled; and (3) lives in the claimant's home in the
United States for more than half of the year (or all of the year if a
foster child).  Beginning with tax year 1994, the EIC was denied for
wages earned by prison inmates.  Beginning with tax year 1995, the
EIC was (1) extended to taxpayers living outside of the United States
because of a military assignment if they meet all other criteria and
(2) denied to anyone who spent part of the tax year as a nonresident
alien. 

\2 Increases in the credit rates were to be phased-in over a 4-year
period from 1991 to 1994. 


   CALCULATION OF THE EIC FOR TAX
   YEAR 1994
------------------------------------------------------------ Letter :7



   (See figure in printed
   edition.)

   Source:  IRS data.

   (See figure in printed
   edition.)


      HOW THE CREDIT WAS
      CALCULATED IN TAX YEAR 1994
---------------------------------------------------------- Letter :7.1

EIC credit amounts are determined according to taxpayers' number of
qualifying children and earned income\3 or, in some cases, AGI.\4 The
credit gradually phases in with increasing income, plateaus at a
maximum amount, and then phases out until it reaches zero.  If a
taxpayer's earned income or AGI exceeds the maximum qualifying income
level, they are not eligible for the credit.  When taxpayers' AGI
falls in the credit's phase-out range, they receive the lesser amount
resulting from using their earned income or AGI in calculating the
credit. 

The table shows the credit as structured for tax year 1994.  The
credit phased in at different rates for families with one qualifying
child, families with two or more qualifying children, and childless
adults.  For example, taxpayers with one qualifying child got an
earned income credit of 26.3 cents for each dollar of earned income
up to $7,749, and taxpayers with two or more qualifying children got
an EIC of 30 cents per dollar of earned income up to $8,399. 

The maximum credits for tax year 1994 (the amount going to all
taxpayers with income in the plateau range) were $2,038, $2,528, and
$306 for recipients with one, two or more, or no qualifying children,
respectively. 

Like the credit phase-in, phase-out rates also varied by number of
qualifying children.  For example, taxpayers with one qualifying
child lost 15.98 cents from the maximum credit amount ($2,038) for
each dollar of income over $11,000 until their credit reached zero at
income of $23,755.  Taxpayers with two or more qualifying children
lost 17.68 cents per dollar of income over $11,000; their EIC reached
zero at income of $25,296. 

Briefing Section II

--------------------
\3 Earned income for the purpose of calculating the EIC includes both
taxable and nontaxable earned income.  For the EIC, taxable earned
income includes (1) wages, salaries, and tips, (2) union strike
benefits, (3) long-term disability benefits received prior to minimum
retirement age, and (4) net earnings from self-employment.  Among the
earned income items that are nontaxable are (1) voluntary salary
deferrals, such as 401(k) plans or the federal thrift savings plan;
(2) pay earned in a combat zone; (3) basic quarter and subsistence
allowances from the U.S.  military; (4) housing allowances or rental
value of a parsonage for the clergy; and (5) excludable dependent
care benefits. 

\4 In addition to taxpayers' earned income, AGI includes their
taxable income from other sources such as investments, alimony, and
unemployment compensation. 


TRENDS IN EIC COSTS AND
PARTICIPATION
============================================================== Letter 


   EIC COSTS AND RECIPIENTS, TAX
   YEARS 1990 - 1994
------------------------------------------------------------ Letter :8



   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      EXPANDING EIC ELIGIBILITY
      AND BENEFITS HAVE INCREASED
      PROGRAM COSTS
---------------------------------------------------------- Letter :8.1

EIC costs, in constant 1994 dollars, grew from $8.6 billion in tax
year 1990 to $21.2 billion in tax year 1994, about a 150 percent
increase.  Over that same period, the number of taxpayers claiming
the EIC increased by about 50 percent--from 12.6 million recipients
in tax year 1990 to 19.1 million in tax year 1994. 

The figure reflects the impact of eligibility and benefit changes
implemented in 1991 and 1994.  In tax year 1991, the addition of the
supplemental young child and health insurance credits, separate
credit rates for larger families, and an increase in the basic credit
amount took effect.  In tax year 1994, the repeal of the supplemental
credits, addition of childless adult credit recipients, and another
general increase in credit amounts for families with children took
effect. 

Excluding taxpayers who received the credit for childless adults in
1994, EIC costs for families with children (in 1994 dollars)
increased by 140 percent from 1990 to 1994, and the number of
recipients increased by 19 percent. 


   EIC BY FAMILY TYPE, TAX YEARS
   1991 - 1994
------------------------------------------------------------ Letter :9



   (See figure in printed
   edition.)

   Note:  Tax year 1991 was the
   first year in which the EIC
   included separate credit
   amounts by family size.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      CHANGES IN 1994 GAVE LARGEST
      BENEFIT INCREASES TO EIC
      FAMILIES WITH TWO OR MORE
      CHILDREN
---------------------------------------------------------- Letter :9.1

The total number of EIC families with children actually declined from
15.1 million recipients in tax year 1993 to 14.9 million in tax year
1994,\5 and the total EIC awarded to families with children (in
constant 1994 dollars) increased from $15.9 billion to $20.5 billion. 
The average credit for families with one qualifying child was $1,023
for tax year 1993 and $1,283 for tax year 1994.  The average credit
for families with two or more qualifying children increased from
$1,033 to $1,474. 


--------------------
\5 IRS attributes at least a portion of this 1993 - 1994 decline in
the total number of families with children claiming the credit to
IRS' EIC compliance efforts during the 1995 filing season.  We plan
to issue a separate report later this year on IRS' EIC compliance
efforts in 1995. 


   PORTION OF EIC OFFSETTING TAXES
   AND REFUNDED, TAX YEARS 1990 -
   1994
----------------------------------------------------------- Letter :10



   (See figure in printed
   edition.)

   \ a "Offset taxes," as defined
   by IRS, refers to tax
   liabilities reported on
   recipients' individual income
   tax returns.  In addition to
   income tax obligations,
   individuals' tax liabilities
   from tax year 1994 returns may
   also have included any of the
   following other taxes: 
   self-employment tax,
   alternative minimum tax, social
   security and medicare taxes on
   tip income not reported to an
   employer, recapture taxes, and
   tax on qualified retirement
   plans. 

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      REFUNDABLE PORTION OF THE
      EIC HAS INCREASED
--------------------------------------------------------- Letter :10.1

The EIC is a refundable tax credit.  As such, the portion of the
credit that offsets taxes owed by EIC recipients and reported on
individual income tax returns is considered a tax expenditure, or a
reduction in taxes due to a preferential provision in the federal tax
law.  The remaining, refunded portion of the EIC is considered a
federal outlay. 

In tax year 1990, $2.6 billion of EIC offset recipients' tax
liabilities, while $6.0 billion were claimed by taxpayers as refunds
(both figures in 1994 dollars).  In tax year 1994, $4.5 billion of
EIC offset taxes, and $16.7 billion were claimed as refunds. 


Briefing Section III
CHARACTERISTICS OF TAX YEAR 1994
EIC RECIPIENTS
============================================================== Letter 


   TOTAL EIC BY TYPE OF RECIPIENT,
   TAX YEAR 1994
----------------------------------------------------------- Letter :11



   (See figure in printed
   edition.)

   Note:  Totals may not add due
   to rounding.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)

   As shown in the table, 19.1
   million taxpayers claimed total
   EIC of $21.2 billion for tax
   year 1994.  Childless adult
   recipients accounted for 22
   percent of the recipients, but
   only 3 percent of the total EIC
   amount.

   (See figure in printed
   edition.)


   AMOUNT OF EIC USED TO OFFSET
   TAXES AND AMOUNT REFUNDED, TAX
   YEAR 1994
----------------------------------------------------------- Letter :12



   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)

   The refundable portion of the
   EIC accounted for $16.7
   billion, or 79 percent of the
   total EIC awarded in tax year
   1994.  The remaining 21 percent
   of the total credit amount was
   used to offset income tax ($2.8
   billion) and other taxes ($1.7
   billion) reported on
   recipients' income tax returns. 
   These other taxes include
   self-employment tax, social
   security and medicare taxes on
   tip income not reported to an
   employer, recapture taxes,
   alternative minimum tax, and
   tax on qualified retirement
   plans.

   (See figure in printed
   edition.)


   FILING STATUS OF EIC
   RECIPIENTS, TAX YEAR 1994
----------------------------------------------------------- Letter :13



   (See figure in printed
   edition.)

   \ a Confidence intervals are
   +/- 15 to +/- 30 percent of
   reported values.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


   AGE OF PRIMARY FILER, EIC
   RECIPIENTS, TAX YEAR 1994
----------------------------------------------------------- Letter :14



   (See figure in printed
   edition.)

   \ a Taxpayers claiming the EIC
   for childless adults must be at
   least 25 but less than 65 years
   old.  There are no age limits
   on the EIC for families with
   children.

   (See figure in printed
   edition.)

   \ b Confidence interval is +/-
   22 percent of the reported
   value.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


   USE OF ELECTRONIC FILING, EIC
   AND NON-EIC RETURNS, TAX YEAR
   1994
----------------------------------------------------------- Letter :15



   (See figure in printed
   edition.)

   \ a Percentages are based on
   the number of taxpayers filing
   each type of return.  For
   example, 38.0 percent of 1040A
   filers who claimed the EIC used
   electronic filing compared to
   10.5 percent of 1040A filers
   who did not claim the EIC. 

   (See figure in printed
   edition.)

   \ b Confidence intervals are
   +/- 22 percent and +/- 12
   percent of reported values for
   EIC 1040EZ and 1040 returns,
   respectively.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      EIC RECIPIENTS USED
      ELECTRONIC FILING MORE OFTEN
      THAN DID OTHER TAXPAYERS
--------------------------------------------------------- Letter :15.1

As a group, taxpayers claiming the EIC used electronic filing more
frequently than did taxpayers who did not claim the EIC.  Overall, 26
percent of returns with an EIC were filed electronically compared to
7 percent of returns with no EIC claim.  The figure shows the use of
electronic filing by type of tax return.\6

For tax year 1994, 56 percent of EIC recipients (families with
children and childless adults) filed form 1040A, and 34 percent filed
form 1040.  Among taxpayers not claiming the EIC, 16 percent filed
form 1040A, and 62 percent filed form 1040. 


--------------------
\6 Taxpayers claiming the EIC for childless adults may do so using
forms 1040EZ, 1040A, or 1040; taxpayers claiming the credit for
families with children may only use forms 1040A and 1040. 


   USE OF PAID PREPARERS, EIC AND
   NON-EIC RETURNS, TAX YEAR 1994
----------------------------------------------------------- Letter :16



   (See figure in printed
   edition.)

   \ a Confidence interval is +/-
   22 percent of the reported
   value.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)

   Although 65 percent of EIC
   recipients filed IRS' simpler
   individual tax forms (the
   1040EZ and 1040A), they used
   paid preparers about as often
   as filers who did not claim the
   EIC.  Some of the taxpayers who
   used paid preparers may have
   done so simply as a means to
   file their returns
   electronically.  Overall, paid
   preparers completed about half
   of EIC and non-EIC returns.

   (See figure in printed
   edition.)


   EIC RECIPIENTS REPORTING
   OCCUPATION AS DISABLED,
   RETIRED, OR STUDENT, TY 1994
----------------------------------------------------------- Letter :17



   (See figure in printed
   edition.)

   \ a Occupation information is
   self-reported by taxpayers on
   their tax returns, and IRS does
   not verify this information
   when it creates the SOI
   databases.  In the 1994 sample,
   87 percent of returns included
   information on the primary
   taxpayer's occupation; however,
   we do not know the extent to
   which self-reporting of
   occupations is subject to
   inconsistencies or biases.  For
   example, taxpayers report their
   occupations at the time of
   filing in 1995, but their
   occupations may have been
   different in 1994.  The data
   reported in this table does not
   account for spouses'
   occupations.  Confidence
   intervals on this data,
   assuming no biases or
   inconsistencies, are +/- 17 to
   +/- 29 percent of reported
   values.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


   EIC RECIPIENTS AND THE CHILD
   AND DEPENDENT CARE CREDIT, TY
   1994
----------------------------------------------------------- Letter :18



   (See figure in printed
   edition.)

   \ a Confidence interval is +/-
   12 percent of the reported
   value.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      SOME EIC RECIPIENTS WERE
      ALSO ABLE TO CLAIM THE CHILD
      AND DEPENDENT CARE CREDIT
--------------------------------------------------------- Letter :18.1

Taxpayers who claim the EIC for families with children may also file
for the child and dependent care credit.  Any taxpayer who incurs
child or dependent care expenditures in order to work may claim this
credit.  The child and dependent care credit is not refundable; it
goes only to taxpayers with a tax liability. 

For tax year 1994, 1.2 million EIC recipients (8 percent of all EIC
families with children) claimed $507 million in child and dependent
care credits in addition to $1.2 billion of EIC.  For these families,
the average child and dependent care credit was $421, and the average
EIC was $1,007. 


   MAJOR SOURCES OF INCOME, ALL
   EIC RECIPIENTS, TAX YEAR 1994
----------------------------------------------------------- Letter :19



   (See figure in printed
   edition.)

   Note:  Percentages do not add
   to 100.  Recipients report more
   than one type of income, and
   not all income types are shown
   in the table.

   (See figure in printed
   edition.)

   \ a Schedule C is used to
   report business income/losses
   from self-employment.  Schedule
   E is used to report
   income/losses from rental real
   estate, royalties,
   partnerships, S corporations,
   estates, and trusts.

   (See figure in printed
   edition.)

   \ b Confidence intervals are
   +/- 11 to +/- 25 percent of
   reported values, except for
   Schedule E percentage of total
   income, which is +/- 100
   percent.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      SALARIES, WAGES, AND
      SELF-EMPLOYMENT INCOME
      ACCOUNTED FOR MOST OF EIC
      RECIPIENTS' TOTAL INCOME
--------------------------------------------------------- Letter :19.1

The EIC is intended to be claimed by low-income workers, and, as
expected, salaries, wages, and self-employment income accounted for
about 97 percent of EIC recipients' total income, before adjustments,
in 1994.  The table shows the types of income by descending order of
the number of recipients reporting each type. 

Although 21.6 percent of recipients reported investment income from
either taxable interest or dividends,\7 this income accounted for
less than 1 percent of total income before adjustments.  Of the 3.9
million recipients reporting interest income in 1994, 60 percent
reported an amount less than $100, and 86 percent reported less than
$500.  Of the 0.7 million recipients reporting dividend income, 44
percent\8 reported an amount less than $100, and 75 percent reported
less than $500. 


--------------------
\7 The percentage of recipients reporting interest or dividends is
not equal to the sum of the percentages for interest (20.6) and
dividends (3.9) reported in the table because recipients can have
both types of income. 

\8 Confidence interval is +/- 12 percent of the reported value. 


   1996 EIC INVESTMENT INCOME
   THRESHOLD APPLIED TO TAX YEAR
   1994
----------------------------------------------------------- Letter :20



   (See figure in printed
   edition.)

   \ a Confidence intervals are
   +/- 15 to +/- 19 percent of the
   reported values.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      INVESTMENT INCOME THRESHOLD
      WOULD HAVE ELIMINATED A
      SMALL PERCENTAGE OF 1994
      RECIPIENTS
--------------------------------------------------------- Letter :20.1

In 1995, Congress enacted an indirect wealth test to eliminate
certain taxpayers from the EIC program.  Beginning with tax year 1996
returns, taxpayers with investment income greater than $2,350 will no
longer be eligible for the EIC, regardless of their earned income or
AGI.  Investment income includes taxable and nontaxable interest,
taxable dividends, and net rents and royalties derived from sources
outside the taxpayer's ordinary course of trade or business. 

To estimate the impact of this provision, we deflated the 1996
investment income threshold to 1994 dollars ($2,210)\9 and applied it
to all tax year 1994 EIC recipients (with and without qualifying
children).  Had the investment income threshold been in place in tax
year 1994, about 284,000 taxpayers who claimed the EIC (1.5 percent
of all recipients) would not have been able to do so.  The total EIC
awarded to these individuals was $212 million, or 1.0 percent of the
total EIC awarded that year. 

Briefing Section IV

--------------------
\9 We used the CPI-U as projected by the Congressional Budget Office
in The Economic and Budget Outlook:  An Update, Aug.  1995. 


FAMILIES WITH CHILDREN AND INCOME
IN THE CREDIT PHASE-OUT RANGE
============================================================== Letter 


   EIC FAMILIES WITH CHILDREN BY
   CREDIT RANGE, TAX YEAR 1994
----------------------------------------------------------- Letter :21



   (See figure in printed
   edition.)

   \ a Confidence interval is +/-
   11 percent of the reported
   value.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)

   Of the 15 million taxpayers
   claiming the EIC for families
   with children, more than half
   have income in their respective
   credit phase-out range.  For
   tax year 1994, 8.9 million
   families with children had
   income in the phase-out range;
   the remaining 6.1 million had
   income in the phase-in or
   plateau ranges.

   (See figure in printed
   edition.)


   DISTRIBUTION IN THE PHASE-OUT
   RANGE, EIC FAMILIES WITH
   CHILDREN, TY 1994
----------------------------------------------------------- Letter :22



   (See figure in printed
   edition.)

   \ a Confidence intervals are
   +/- 11 to +/- 15 percent of the
   reported values.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)

   To determine the distribution
   within the phase-out range of
   EIC recipients with children,
   we divided the ranges for both
   family sizes into quarters.  As
   shown in the table, recipients
   were distributed a bit more
   heavily in the lower half of
   the phase-out ranges.

   (See figure in printed
   edition.)


   FILING STATUS BY CREDIT RANGE,
   EIC FAMILIES WITH CHILDREN, TAX
   YEAR 1994
----------------------------------------------------------- Letter :23



   (See figure in printed
   edition.)

   \ a Confidence intervals are
   +/- 36 percent and +/- 19
   percent of the reported values
   for single filers in the
   phase-out and phase-in/plateau
   ranges, respectively.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)

   Among EIC families with
   children, those in the
   phase-out range had a higher
   proportion of married filers. 
   Within the phase-out range, 59
   percent of filers were single
   or head of household, and 41
   percent were married.  In
   contrast, 78 percent of
   recipients in the phase-in and
   plateau ranges were single or
   head of household, and 22
   percent were married.

   (See figure in printed
   edition.)


   AGE OF FILER BY CREDIT RANGE,
   EIC FAMILIES WITH CHILDREN, TAX
   YEAR 1994
----------------------------------------------------------- Letter :24



   (See figure in printed
   edition.)

   \ a Confidence intervals are
   +/- 11 to +/- 14 percent of the
   reported values.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


   INCOME SOURCES BY CREDIT RANGE,
   EIC FAMILIES WITH CHILDREN, TAX
   YEAR 1994
----------------------------------------------------------- Letter :25



   (See figure in printed
   edition.)

   Note:  Percentages do not add
   to 100.  Recipients report more
   than one type of income, and
   not all income types are shown
   on the table.

   (See figure in printed
   edition.)

   \ a Schedule C is used to
   report business income/losses
   from self-employment.  Schedule
   E is used to report
   income/losses from rental real
   estate, royalties,
   partnerships, S corporations,
   estates, and trusts.

   (See figure in printed
   edition.)

   \ b Confidence intervals are
   +/- 11 to +/- 67 percent of
   reported values except for
   phase-out range Schedule E
   percentage of income which is
   +/- 100 percent.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      INCOME PATTERNS VARY
      SLIGHTLY BY CREDIT RANGE
--------------------------------------------------------- Letter :25.1

The table shows the types of income reported by EIC recipients in
descending order based on the number of phase-out recipients
reporting each type.  There are some differences in the distribution
of income between the phase-out and phase-in/plateau range groups. 
Although salaries and wages and Schedule C income account for most of
the total income before adjustments for both groups, Schedule C
income accounts for a larger portion of income for recipients in the
phase-in/plateau ranges.  A greater proportion of phase-out range
recipients reported other types of income, particularly taxable
interest, Schedule E, pensions, and dividends, than did those with
incomes in the phase-in and plateau ranges. 


   INVESTMENT INCOME THRESHOLD,
   EIC FAMILIES WITH CHILDREN, TAX
   YEAR 1994
----------------------------------------------------------- Letter :26



   (See figure in printed
   edition.)

   Note:  Confidence intervals are
   +/- 17 to +/- 40 percent of
   reported values.

   (See figure in printed
   edition.)

   \ a Rounded to the nearest
   thousand.

   (See figure in printed
   edition.)

   Source:  GAO analysis of IRS'
   SOI data.

   (See figure in printed
   edition.)


      HALF OF RECIPIENTS MEETING
      THE INVESTMENT INCOME
      THRESHOLD WOULD HAVE BEEN
      FAMILIES IN THE PHASE-OUT
      RANGE
--------------------------------------------------------- Letter :26.1

As discussed on page 33, about 284,000 taxpayers (families with
children and childless adults) who claimed $212 million of EIC in tax
year 1994 would not have been able to do so had the 1996 investment
income threshold of $2,350 been in place that year.  (Deflated to
1994 dollars, the investment income threshold would have been
$2,210.) Phase-out range families with children would have accounted
for 51 percent\10 of the 284,000 recipients and 75 percent of the
$212 million of EIC. 


--------------------
\10 Confidence interval is +/- 15 percent of the reported value. 


MAJOR CONTRIBUTORS TO THIS REPORT
==================================================== Appendix Appendix

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

David Attianese, Assistant Director, Tax Policy and
 Administration Issues
Mary Phillips, Assignment Manager
Deborah Parker Junod, Evaluator-in-Charge
Patricia McGuire, Senior Computer Specialist
James Fields, Social Science Analyst


*** End of document. ***