Why is it important that the EITC be refundable?

Refundability is an important feature of the federal EITC and many state EITCs. A non-refundable credit allows taxpayers to benefit only to the extent that they owe taxes. Such a credit can reduce a family’s taxes to zero, but if a family does not owe any taxes then they cannot benefit from the credit.

However, a refundable credit allows families to benefit from the full value of the credit they have earned even if they owe less in income tax than the amount of the credit. If the amount of the EITC exceeds the amount of income tax owed, the difference is paid back to the filer in the form of a rebate. At least part of the refundable credit offsets payroll and sales taxes, which, for low-income working families, are often larger than income taxes.

It is the refundable nature of the EITC that makes it such a powerful poverty fighting tool. The EITC provides a very considerable boost to low-income workers' take home pay, making each hour worked far more valuable to a struggling family.

For more information on state Earned Income Tax Credits, please see “A HAND UP: How State Earned Income Tax Credits Help Working Families Escape Poverty in 2006,” by Ami Nagle and Nicholas Johnson at the Center on Budget and Policy Priorities.

For further information on the procedure and for cost estimates for your state, please see: “Estimating the Cost of a State Earned Income Tax Credit,” from the Center on Budget and Policy Priorities.