Look Out Below: Steep "Cliff" Means Many Working Poor Lose Tax Credit

By Sarah Stecker

ONE STEP FORWARD, TWO STEPS BACK

The way things work in New Jersey, when a low-income household makes a little more money it can turn into a very costly proposition.

Case in point: If a married couple with two or more children and getting the state Earned Income Tax Credit sees its taxable income go to $21,000 from $19,000, it actually nets only $586 more-not $2,000. Here’s why. At $21,000 the household crossed two thresholds. It is no longer eligible for the state EITC, for a $769 loss; and it reaches the level where it owes state income tax-for this family, $224.

Contrast that with what happens when a high-income household sees its prospects improve by the same $2,000. A household where income rose to $502,000 from $500,000 had an added state income tax bill of just $179.

This dramatic disparity occurs because, of all the states that have EITCs, only New Jersey cuts off eligibility at $20,000 in yearly income. The other 18 states and the District of Columbia use the same eligibility rules as the federal Earned Income Tax Credit program: depending on family size and income, the amount of benefits decreases gradually; even at $38,222 a two-adult, two-child family was eligible for at least some EITC benefits in 2006.

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