Federal tax credits are powerful tools to boost income and help families and communities thrive. But what are tax credits exactly? How do they work, and what do they accomplish? This explainer identifies common tax credit lingo and will focus on two popular tax credits that make a substantial difference in children’s lives: the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).
What is a tax credit?
A dollar-for-dollar reduction on a taxpayer’s bill. A tax credit directly reduces the amount a working household owes to the International Revenue Service (IRS). A tax credit is also a way to recognize and offset the costs working families face. The EITC and CTC, for example, help to offset the expense of raising children. Some tax credits are refundable, others are nonrefundable.
Refundable? Nonrefundable? What does that mean?
A nonrefundable credit can shave a working household’s tax bill down to zero. But if a tax credit reduces the amount a household owes beyond zero and edges over into “the negative,” a nonrefundable credit doesn’t allow a family to keep the leftover amount. A refundable tax credit, however, allows a family to receive a refund check if the value of their tax credit exceeds the amount of income tax they owe. Basically, a refundable tax credit allows a family to receive “the negative” as a refund check.
How many types of tax credits are there?
Many! This post focuses on two of the most popular and successful federal tax credits, the EITC and CTC. These credits lift millions of children out of poverty each year and support children’s healthy development.
Wait a minute. How do tax credits lead to benefits for children?
Money itself matters in children’s development and wellbeing. One direct way to tackle poverty is to increase families’ cash incomes. The EITC and CTC do just that by supplementing the earnings of millions of low- and moderate-income families each year. Together, the EITC and CTC lifted 4.5 million children out of poverty in 2017.
What’s more, these tax credits have been linked to improved infant and maternal health, higher achievement in school and increased college attendance. Research supports that the EITC and CTC lead to benefits for a child at just about every phase of a child’s life.
So what’s the big takeaway?
Tax credits can have huge, long-term payoffs in the lives of children. As tax day nears, it’s time to give credit where credit is due to the EITC and CTC. And it’s also worth considering how these hard-working credits can be improved to bring even stronger benefits to children and their hard-working parents.