What is the earned income tax credit (EITC)?

The earned income tax credit (EITC) is a refundable tax credit designed specifically to provide financial relief to low to moderate-income working individuals and families. This credit aims to incentivize work and reduce poverty by offering eligible taxpayers a significant reduction in their tax liability. The refundable nature of the EITC means that if the credit exceeds the amount of taxes owed, the taxpayer can receive the difference as a refund, thereby offering direct financial support.

This characteristic of the EITC distinguishes it from non-refundable credits, which can only reduce one's tax liability to zero and do not provide a refund. The EITC is based on a combination of income earned and the number of qualifying children, encouraging employment among lower-income households.

In contrast to the other options, a non-refundable tax credit for high-income taxpayers does not capture the essence of the EITC, as it specifically targets lower-income earners. The mention of a tax credit for capital gains would be irrelevant to the EITC as it focuses solely on earned income. Finally, a tax exemption for retirees does not align with the EITC's purpose, which is centered around improving the financial situation of working individuals rather than pensioners.