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Increases in the federal earned income tax credit and child tax credit will boost state tax credits in 25 states, according to the Tax Policy Center.
The American Rescue Plan boosted the federal earned income tax credit and child tax credit, so 25 states and Washington, D.C., will automatically see increases in their state earned income tax credits because of existing links between federal and state tax codes, according to the Tax Policy Center.
According to the center’s report, the federal earned income tax credit and child tax credits provide significant assistance to low- and moderate-income families with children. These two tax credits are responsible for lifting more people out of poverty than any other government program besides social security.
As with previous federal tax changes, the American Rescue Plan will affect state taxes because of conformity rules. Unless states take action to offset the impact, the plan will increase state earned income tax credits for residents in 25 states and Washington, D.C., giving 4.6 million taxpayers an average tax reduction of $153.
Because their state earned income credits are not set as a percentage of the federal credit, California, Indiana and Wisconsin will not see automatic increases, the paper says.
The center’s research shows that 4.6 million U.S. households will see an average state earned income tax credit increase. For about 1 million households, state taxes will go up by about $153, but that is a much smaller amount than the average federal tax cut -- $2,700 -- that these households will gain.
All states that conform their tax codes automatically to changes in the federal code could pass legislation to decouple their state credits from the federal tax credits, says the center, which is a joint effort of the Urban Institute and Brookings Institution. This would break the link between federal and state taxes -- a break that is considered to be beneficial to taxpayers and states.
The federal child tax credit increases will reduce federal income taxes by about $108 billion this year, the report says. Oklahoma is the only state that will have an automatic change to its child tax credit.
The report notes that some states allow residents to reduce how much income they owe taxes on by the amount of their federal income taxes. In these states, the drop in federal taxes will lead to more income being taxed at the state level.
Other states limit state tax credits to the amount of tax owed at the federal level. When less tax is owed to the U.S. government, state tax credits drop, the center wrote.
To see more information about these tax changes click the link here.
Brent Woodie is an associate editor at Route Fifty.