What does the Earned Income Tax Credit (EITC) do?

The Earned Income Tax Credit (EITC) is designed specifically to benefit low to moderate-income workers by reducing the amount of tax they owe and potentially providing a refund. This credit is particularly advantageous for those who have earned income but may not earn enough to meet their basic living expenses.

When eligible taxpayers file their income tax returns, they can claim this credit, which effectively lowers their tax liability. If the credit exceeds what they owe in taxes, they can receive the difference as a refund. This mechanism not only encourages work but also aims to lift individuals and families out of poverty by supplementing their earnings.

In contrast, the other options do not accurately capture the function of the EITC. Refunds are not universally available to all taxpayers; tax penalties for underreporting income pertain to compliance issues rather than credit benefits; and the standard deduction, while it reduces taxable income, is unrelated to the EITC's purpose of providing support to those who earn lower incomes.