Final answer:
The threshold for investment income disqualifying a taxpayer from the Earned Income Tax Credit in 2022 is $3,650. The EITC is designed to provide financial assistance to low-to-moderate-income earners while encouraging work, and it phases out gradually to avoid a poverty trap.
Step-by-step explanation:
For the tax year 2022, the threshold for investment income that would disqualify a taxpayer from claiming the Earned Income Tax Credit (EITC) is $3,650. This means if an individual's investment income exceeds $3,650, they would not be eligible to claim the EITC.
This credit is aimed at assisting low-to-moderate-income working individuals and families, and it is carefully designed to avoid creating a 'poverty trap' where earning more income could lead to losing benefits at nearly a one-to-one rate. Instead, the EITC is phased out gradually to ensure that as a taxpayer's earnings increase, the credit decreases at a slower rate, thus encouraging work while still providing financial support.
For instance, a single-parent family with two children in 2013 would not have seen a reduction in their EITC as earnings rose from $13,430 to $17,530. Beyond $17,530, each additional dollar earned would have reduced the credit by roughly 21 cents, ensuring that the taxpayer still benefits from having higher income without an immediate and full offset in their EITC benefits.
The EITC has been a significant support system, with approximately 25 million eligible workers and families receiving about $60 billion in EITC in 2021. This tax credit is an essential component of the social safety net, providing monetary assistance which increases as the recipients earn more, up to a point, thereby avoiding a sharp disregard of benefits and reducing the risk inherent in the poverty trap.