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Making Taxes and Welfare Work Together: What Do We Know and What Can We Learn from Other Countries?
Unformatted Document Text:  12 (20 percent of $3,000) for one qualifying child and $1,200 (20 percent of $6,000 for two or more qualifying children for taxpayers with adjusted gross income over $45,000. Perhaps the biggest limitation is that the dependent care credit is not refundable. That means it is of no value to low- income Americans who are exempt from income taxation. d. The new making work pay tax credit is a refundable credit computed as 6.2 percent of earned income, up to a maximum credit of $400 per individual ($800 per couple). The making work pay tax credit 12 2. State Income Taxes Of note, couples can claim the full $800 credit even if only one spouse works. These making work pay credits are phased out once the taxpayer’s modified adjusted gross income exceeds $150,000 for married couples filing joint returns and $75,000 for other taxpayers. More than 40 states and numerous local governments also levy income taxes on individuals. These state income taxes are typically imposed on a variation of federal taxable income, albeit at lower rates. In 2009, for example, the tax rates in Washington, D.C., range from 4.0 to 8.5 percent. 13 3. Social Security Taxes Social Security taxes are levied on earnings in employment and self-employment covered by Social Security, with portions of the total tax allocated by law to the Old-Age and Survivors Insurance trust fund (OASI), the Disability Insurance trust fund (DI), and the Medicare Hospital 11 I.R.C. § 21. 12 I.R.C. § 36A (added by ARRA § 1001). 13 Tax Foundation, Tax Data: State Individual Income Tax Rates, 2000-2009 (January 6, 2009), http://www.taxfoundation.org/taxdata/show/228.html .

Authors: Forman, Jonathan.
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12 
(20 percent of $3,000) for one qualifying child and $1,200 (20 percent of $6,000 for two or more 
qualifying children for taxpayers with adjusted gross income over $45,000.  Perhaps the biggest 
limitation is that the dependent care credit is not refundable.  That means it is of no value to low-
income Americans who are exempt from income taxation. 
d.
 
The new making work pay tax credit is a refundable credit computed as 6.2 percent of 
earned income, up to a maximum credit of $400 per individual ($800 per couple).
The making work pay tax credit 
2.
 
State Income Taxes 
 Of note, 
couples can claim the full $800 credit even if only one spouse works.  These making work pay 
credits are phased out once the taxpayer’s modified adjusted gross income exceeds $150,000 for 
married couples filing joint returns and $75,000 for other taxpayers. 
More than 40 states and numerous local governments also levy income taxes on 
individuals.  These state income taxes are typically imposed on a variation of federal taxable 
income, albeit at lower rates.  In 2009, for example, the tax rates in Washington, D.C., range 
from 4.0 to 8.5 percent.
3.
 
Social Security Taxes 
 
Social Security taxes are levied on earnings in employment and self-employment covered 
by Social Security, with portions of the total tax allocated by law to the Old-Age and Survivors 
Insurance trust fund (OASI), the Disability Insurance trust fund (DI), and the Medicare Hospital 
                                                                                                                                                             
11
 I.R.C. § 21. 
12
 I.R.C. § 36A (added by ARRA § 1001). 
13
 Tax Foundation, Tax Data: State Individual Income Tax Rates, 2000-2009 (January 6, 2009), 
. 


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