Earned Income Credit (EIC): Lessons for Australia in 2025

The Earned Income Credit (EIC) is a game-changing tax provision in the United States, designed to boost the incomes of working households. While Australia has its own set of welfare and tax benefits, the EIC offers a unique blueprint for supporting workers and reducing poverty. In 2025, as the Australian government refines social and economic policy, understanding the EIC’s impact and lessons could help shape smarter financial support for Australians.

What Is the Earned Income Credit (EIC)?

The Earned Income Credit, sometimes called the Earned Income Tax Credit (EITC), is a refundable tax credit for low- to moderate-income workers in the US. It’s designed to incentivise employment and supplement wages, helping to lift families out of poverty. In 2025, the EIC remains a vital support for millions of American households—especially those with children. The credit amount varies based on income, marital status, and the number of dependents, with maximum credits reaching over US$7,000 for families with three or more children.

• Eligibility: Must have earned income from employment or self-employment and meet specific income thresholds.

• Refundable: If the credit exceeds tax owed, the balance is paid as a refund—directly boosting household cash flow.

• Indexed for inflation: Credit amounts and thresholds are updated annually to reflect cost-of-living changes.

For tax year 2025, the maximum income to qualify ranges from approximately US$17,000 (no children, single) up to US$63,000 (married, three+ children). The EIC phases out as income rises, ensuring support targets those who need it most.

The Impact of the EIC: Lessons from the US

Since its inception in 1975, the EIC has become one of America’s largest anti-poverty programs. The 2025 tax year continues to see strong take-up, with nearly 25 million Americans claiming the credit each year. Here’s why it stands out:

• Poverty reduction: The EIC lifts millions of children and working adults above the poverty line annually.

• Work incentive: Unlike some welfare benefits, the EIC increases as workers earn more (up to a point), encouraging employment rather than discouraging it.

• Targeted support: Benefits are focused on families with children, but low-income singles can also qualify, especially after recent expansions.

• Economic stimulus: EIC refunds are spent locally, often supporting small businesses and boosting regional economies.

The EIC’s success has inspired other countries to consider similar models, blending welfare support with incentives to participate in the workforce. Recent US policy debates have focused on expanding eligibility for childless workers and simplifying the claims process—trends worth watching as Australia debates its own tax and welfare reforms.

Could an EIC-Style Credit Work in Australia?

Australia’s tax and welfare system is different, relying heavily on targeted payments like the Family Tax Benefit, JobSeeker Payment, and Child Care Subsidy. However, the idea of a refundable tax credit for low-income earners remains compelling. Here’s how an Australian EIC could fit in the current landscape:

• Simplification: A single, streamlined credit could replace or supplement existing family and low-income benefits.

• Work rewards: Like the US model, a credit tied to earned income would directly reward employment, reducing welfare traps.

• Automatic delivery: Integrating a credit with the ATO’s tax system could make it easier for eligible Australians to receive support without complex applications.

• Recent debates: In 2025, as the Stage 3 tax cuts roll out and debate rages over cost-of-living relief, experts have called for smarter, more targeted support for working households. The EIC offers a practical template.

However, key challenges remain: designing eligibility rules that balance simplicity with fairness, avoiding disincentives to work, and ensuring the credit is large enough to make a difference. As Australia confronts stagnant wage growth, rising living costs, and a widening gap between high- and low-income earners, the EIC story offers both inspiration and a roadmap for reform.

What’s Next for Australia’s Tax and Welfare Policy?

With the 2025 federal budget and ongoing reviews of the welfare system, Australian policymakers have an opportunity to consider global best practices. The US Earned Income Credit’s blend of simplicity, effectiveness, and pro-work incentives shows how targeted support can transform lives and communities. Whether through a new tax credit, expanded family benefits, or innovative pilot programs, the time is right for Australia to explore bold ideas that put working households first.