Question

Tracie provides more than half of the support of her son, Ethan, who does not live with her. Ethan, age 24, is a full-time student in medical school, earns 2,500 from a part-time job, and receives an18,000 scholarship covering his tuition. Is Ethan Tracie's dependent?

1) No, Ethan does not pass the residence test.
2) No, Ethan does not pass the relationship test.
3) Yes, Ethan meets the gross income test and is a qualifying relative.
4) No, Ethan does not meet the gross income test.
5) No, Ethan does not pass the age test.

Answer 1

The poverty trap occurs when increased earnings lead to a nearly equal loss of government benefits, discouraging work. The Earned Income Tax Credit helps alleviate this by only gradually reducing benefits as income increases beyond a certain threshold, allowing for more financial stability as one transitions out of government support.

Step-by-step explanation:

The poverty trap is a situation where individuals receiving government support lose benefits nearly equal to every dollar they earn through work, which can disincentivize employment. The Earned Income Tax Credit (EITC) is designed to mitigate this problem by allowing an increase in income without a proportional decrease in government benefits. For example, in 2013, a single-parent family with two children would not see a reduction in their EITC until they earned beyond a specific threshold ($17,530), and above that threshold, the benefit would be reduced gradually, by only 21.06 cents for each additional dollar earned, phasing out completely at an income level of $46,227. This enables individuals to work and increase their income without losing all their benefits immediately, alleviating the impact of the poverty trap.