SSR 78-18: Earned Income Tax Credits
To establish policy on treatment of earned income tax credits (or refunds) provided under Section 43 of the Internal Revenue Code (IRC) of 1954, as amended, when considering eligibility for, and the amount of, benefits under the supplemental security income (SSI) program.
Sections 204(a) and 209(b) of Public Law 94-12; Section 2, paragraphs (c), (d), (f), and (g), of Public Law 94-164; Sections 401(c) and 402 of Public Law 94-455; Section 401 of Public Law 92-603; Section 212(c)(2) of Public Law 93-66; Regulations No. 16, Sections 416.1112, 416.1201, 416.2025, and 416.2050; and Congressional Record for December 17, 1975, at page S 22468.
Section 204(a) of Public Law 94-12 (Tax Reduction Act of 1975) established a new Section 43 of the Internal Revenue Code of 1954 to provide a tax credit of 10 percent of such earned income, including self-employment income, as does not exceed $4,000 (or a maximum credit of $400) for the taxable year. The amount of the credit is phased down to zero as earned income (or adjusted gross income, if greater) increases from $4,000 to $8,000. Tax credits under Section 43 of the IRC were originally available only for one year; however, this period has been twice extended so that the credits are now available for taxable years beginning after December 31, 1974, and ending before January 1, 1979. Any cost incurred in refunding the tax credits is met from general funds of the U.S. Treasury.
Public Law 94-12 was silent with respect to the treatment of these earned income credits by public assistance programs. However, Section 2(d) of Public Law 94-164, as amended by Section 402 of Public Law 94-455, provides that, for taxable years ending after December 31, 1975:
"Any refund of Federal income taxes made to any individual by reason of section 43 of the Internal Revenue Code of 1954 (relating to earned income credit) shall not be taken into account as income or receipts for purposes of determining the eligibility, for the month in which such refund is made or any month thereafter of such individual or any other individual for benefits or assistance, or the amount or extent of benefits or assistance, under any Federal program or under any State or local program financed in whole or in part with Federal funds, but only if such individual . . . is a recipient of benefits or assistance under such a program for the month before the month in which such refund is made." (Emphasis added.)
Inasmuch as Section 416.1112 of Regulations No. 16 already provides for the exclusion of income tax refunds from income for SSI purposes, the tax credits are excludable from the income of any individual already on the rolls; they would have no effect on such a recipient's Federal SSI payments. In addition, because the definition of income is the same for a deemor as for an eligible individual, the tax credits are also excluded from the income of an individual whose income would be deemed to a recipient or claimant; i.e., an essential person, an ineligible spouse, or (if the claimant or recipient is a child) a parent or spouse of parent.
Section 2(d) of Public Law 94-164 provides for exclusion of the earned income tax credit in determining eligibility or the amount or extent of benefits or assistance "under any Federal program or under any State or local program financed in whole or in part with Federal funds," but only if the individual is a recipient of such assistance for the month prior to the month in which the refund is made. Thus, with respect to an individual initially applying for Federal SSI benefits, an earned income tax credit received in the month of application would clearly not be excluded from income in determining eligibility and payment amount. Even if an individual's actual income tax is less than the amount refunded under Section 43, the exclusion can apply since some taxes (e.g., FICA) would have been paid irrespective of any liability for a personal income tax, and Congress has clearly labeled the credit allowed as a "refund of Federal income taxes." Some questions do arise, however, with respect to treatment of these credits in relation to individuals who receive various types of State supplementary payments, but do not receive a Federal SSI payment, for the month prior to receipt of the refund.
Pursuant to Section 416.2025 of Regulations No. 16, Federal countable income rules are used when a State optional supplement program is administered by the Federal Government. Thus, whatever decision is made with respect to a Section 43 earned income credit for purposes of a Federal SSI payment would be equally valid for a federally administered optional supplement, and receipt of such a supplement for the month prior to receipt of a Section 43 credit, even if no Federal payment were involved, would permit the exclusion of a Section 43 credit from income. The effects of such a credit on a program of optional supplementation which is administered by a State would appear to be a matter for consideration solely by the State. It is not taken into consideration for purposes of a Federal determination of eligibility.
The more difficult questions arise with respect to mandatory minimum supplementary payments since, even where such payments are federally administered, Section 416.2050 of the regulations requires the application of State countable income rules. The issues here are whether such benefits, when paid by the Secretary on behalf of a State are financed at least in part by Federal funds and whether State administration of mandatory supplements constitutes a "Federal program." Where a State's liability for payment of the benefits is limited by Section 401 of Public Law 92-603 (the "hold-harmless" provision which is made applicable to the mandatory supplement pursuant to Section 212(c)(2) of Public Law 93-66), such benefits may be considered to be financed in part by Federal funds. Where this "hold harmless" limitation does not apply, it can still be argued that Federal administration of a State's mandatory supplementation program constitutes a "Federal program." Moreover, even a State-administered mandatory supplement may be considered a "Federal program" since the supplements are mandated by a Federal statute, the rules for such a program are prescribed by the Federal Government, and failure to comply with Federal requirements can result in loss of Federal Medicaid funds. This interpretation has the advantage of providing similar treatment of SSI recipients regardless of whether mandatory supplementation is administered federally or by a State.
POLICY DIRECTIVE STATEMENT:
An earned income tax credit under the provisions of Section 43 of the Internal Revenue Code of 1954, as amended, is excluded from the income of any SSI claimant or recipient for a taxable year which begins after December 31, 1974, and ends before January 1, 1976. For taxable years ending after December 31, 1975, an earned income tax credit under Section 43 of the Internal Revenue code is excluded from income only if, for the month prior to the month in which he or she receives the credit, the individual receives a Federal SSI benefit, a federally administered State supplementary payment (either mandatory or optional) or a State-administered mandatory supplement. Receipt of a State-administered optional supplementary payment is not material to the excludability of an earned income credit. Section 43 earned income credits are excluded at all times from income to be deemed to any SSI claimant or recipient. However, under existing rules, an earned income credit is countable as a resource to the extent that it is retained until the first day of the quarter following the quarter of its receipt.
To be eligible for an earned income tax credit (refund), an individual must have earned income not in excess of $8,000 for a taxable year beginning after December 31, 1974, and ending before January 1, 1979. He or she must also maintain a household in the United States for himself/herself and at least one dependent child as defined for Federal income tax purposes. Whether or not any income tax is payable, such an individual must file an income tax return in order to obtain the credit.
Under all circumstances, verification is required to prove that a reported receipt of cash was an earned income credit. For earned income tax credits received by an SSI claimant for a taxable year ending after December 31, 1975, the individual's allegation of a receipt of a Federal SSI benefit, federally administered State supplementary payment, or State-administered mandatory supplement for the preceding month must be verified.
If the SSI recipient who receives an earned income tax credit is blind and has had social security taxes (i.e., FICA and/or self-employment) excluded from SSI countable income as a work expense, the person continues to qualify for the mandatory payroll tax withholding exclusions as work expenses even though he or she may receive a full tax credit.
In August of 1976, only 2.9 percent of all SSI recipients had earned income. Of these, the number who also maintain households for dependent children (as defined for Federal income tax purposes) is minimal. Therefore, the tax credit provisions of Section 43 of the Internal Revenue Code should not have significant impact on the SSI population.