Refundable credits are designed to help low-income individuals reduce their tax burden or to provide incentives for other activities. The number of these credits has varied over time because some credits are available for a limited period that is set by law. The two largest refundable credits designed to help low-income individuals are the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC).
The Earned Income Tax Credit (EITC)
The EITC is used to offset the impact of Social Security taxes on low-income families and to encourage them to seek employment.
Congress created the EITC in 1975. Since then, the EITC has been modified a number of times to help improve the administration of the credit and to make the law less complex. For example, the initial eligibility requirements were revised to make taxpayers ineligible to receive the credit when the taxpayer has a Social Security Number (SSN) that is not valid for employment. Congress also implemented a uniform definition of a qualifying child that applied to most child‑related tax provisions. Most recently, the EITC was expanded to provide for a temporary increase in the EITC and expansion of the credit for workers with three or more qualifying children.
Taxpayers use Form 1040 (Schedule EIC), Earned Income Credit, to report the EITC qualifying child information. Taxpayers must meet specific criteria to qualify for the EITC that includes having a valid SSN. Additional criteria apply for those taxpayers who have qualifying children, including certain age, relationship, and residency tests. The resulting amount of the EITC a taxpayer can receive is based on the taxpayer’s earned income and the number of qualifying children. Appendix V lists the rules taxpayers must meet to qualify for the EITC.
Additional Child Tax Credit (ACTC)
The ACTC is used to adjust the individual income tax structure to reflect a family’s reduced ability to pay taxes as family size increases.
The Child Tax Credit (CTC) and the ACTC (the refundable portion of the CTC) were enacted by the Taxpayer Relief Act of 1997. Congress believed that a tax credit for families with dependent children would reduce the individual income tax burden for families, better recognize the financial responsibilities of raising dependent children, and promote family values. To qualify for the CTC, a taxpayer must have a qualifying child.
Taxpayers use Schedule 8812, Child Tax Credit, to compute the ACTC and document whether the children claimed on the tax return who have an Individual Taxpayer Identification Number meet the qualifying eligibility tests of substantial presence in the United States. The amount of the ACTC a taxpayer may receive, if any, is dependent on the total amount of the taxpayer’s CTC and the taxpayer’s earned income.
The CTC can reduce an individual’s taxes owed by as much as $1,000 for each qualifying child. Because the CTC is nonrefundable, the amount that can be claimed is limited to an individual’s reported tax liability. The ACTC is the refundable portion of the CTC and is provided to qualifying individuals even if no income tax is withheld or paid; that is, the credit can exceed the tax liability.
Like the EITC, Congress has changed the CTC and the ACTC several times since they were enacted in Calendar Year 1997. These changes allowed more families to be eligible for the ACTC. For example, the American Recovery and Reinvestment Act of 2009 reduced the minimum earned income amount used to figure the ACTC to $3,000. Reducing the amount to $3,000 expanded the number of taxpayers who could then qualify for the ACTC as well as increased the amount of the ACTC they could receive. The $3,000 minimum earned income amount has been extended by law through Tax Year 2017.