For some tax credits, the amount an eligible filer can receive is higher if their earnings or income is higher, up to a certain level. The stretch of income where the potential credit amount increases is referred to as the “phase-in.”
For example, suppose a $100 tax credit increases in value by $10 for every additional $1,000 of earnings in the phase-in range between $10,000 and $20,000. Taxpayer A earning $10,000 would be eligible for a $100 tax credit, while Taxpayer B who earned $20,000 would be eligible for a $200 credit. In other words, Taxpayer B would be at a higher point on the phase-in and therefore qualify for a larger credit.
A phase-in is one way to determine how much of a credit a person can receive. The two largest tax benefits for families with low incomes who have children, namely the earned income tax credit (EITC) and the refundable portion of the child tax credit (CTC), phase in with earnings, meaning recipients must have earned income from employment (including self-employment) to receive these credits. This is why the phase-in could be considered a “work requirement.” Families with low incomes who have no earnings cannot receive either of these credits.
Let’s look at the CTC in detail to learn more about the phase-in.
Characteristics of a phase-in include:
- An income or earnings level where the credit begins to increase in value
- A rate or speed at which it increases
- A maximum credit amount, at which point the phase-in ends
In Figure 1 below, the horizontal axis represents a person’s earnings, which is assumed to be equal to adjusted gross income. The vertical axis is the credit amount a person would receive. The red line demonstrates the relationship between the credit amount and earnings, with the upward slope illustrating the credit phase-in. If the filer has more earnings, they can be higher up along the phase-in, resulting in a larger credit amount.
A family with low income must have at least $2,500 of earnings to start receiving the refundable portion of the CTC (red zone in Figure 1), which they can receive even if they owe no income taxes under the progressive federal income tax structure. After that point, the credit amount increases with earnings (yellow zone) until it equals the maximum credit available to families with low incomes who have no income tax liability. Their credit will not increase again until they have enough earnings to owe income taxes (dark gray zone).
In this example, the credit increases again when this family would begin to owe income taxes and the credit would offset those taxes (light gray zone). For families with higher incomes, the credit falls in value or phases out.
For the CTC, the exact income range over which the credit phases in can differ based on the taxpayer’s filing status (i.e. whether they file as married or head of household status) and the number of credit-eligible children they have.
Short of eliminating phase-ins entirely, as was done in 2021 for the CTC, one of the most effective ways to provide additional benefits to working families with low incomes is by phasing in the credit at a higher rate. For example, TPC estimates show you can provide more benefits to families with low incomes by phasing in the CTC faster for larger families.
