Difficulty: Medium
Correct Answer: It is a refundable tax credit for eligible low and moderate income individuals and families who earn income from work and file an income tax return.
Explanation:
Introduction / Context:
The Earned Income Tax Credit EITC is a well known feature of tax systems such as that of the United States and is sometimes discussed in general knowledge and finance interviews. The question asks what EITC means and who it is designed to benefit. Understanding this concept shows awareness of how governments use tax credits to support working individuals and families with lower incomes and to encourage participation in the labour force.
Given Data / Assumptions:
Concept / Approach:
The EITC is a refundable tax credit that reduces the tax owed by eligible workers and can result in a refund even if their tax liability is very low. The word earned indicates that the taxpayer must have income from employment or self employment not just investment income. The policy objective is to supplement the earnings of low and moderate income workers, especially those with children, and to make work more financially rewarding. Because it is refundable it can provide a net payment to the taxpayer. It is not a penalty, not limited to capital gains and not restricted to large corporations.
Step-by-Step Solution:
Step 1: Focus on the phrase earned income which suggests wages or self employment income rather than passive investment income or corporate profits.Step 2: Recall that EITC is widely described as a refundable credit targeted at low and moderate income workers.Step 3: Consider whether any of the options match this description. Option A directly states that it is a refundable tax credit for eligible low and moderate income individuals and families with earned income.Step 4: Note that penalties rebates on capital gains and corporate incentives do not match the idea of an earned income credit.Step 5: Choose the option that correctly identifies the beneficiaries as working individuals and families with lower income levels.
Verification / Alternative check:
To verify, consider how EITC is described in public information campaigns. Governments encourage eligible workers to claim the credit when they file their income tax return and often highlight that it can result in a larger refund. The emphasis is always on working people who earn wages or self employment income and meet income and family status criteria. There is no link to corporate investment or to penalties, which confirms that option A correctly captures the meaning and purpose of EITC.
Why Other Options Are Wrong:
Option B describes a penalty for late filing by high income taxpayers which is the opposite of a credit for low income workers. Option C limits the benefit to long term capital gains, but EITC is not related to investment gains and can be claimed even by individuals with no capital gains. Option D refers to corporate tax incentives for infrastructure investment, which belong to a completely different category of tax policy. None of these match the structure or target group of the Earned Income Tax Credit.
Common Pitfalls:
Some candidates confuse EITC with general tax rebates or with social welfare benefits that do not depend on work. Another pitfall is ignoring the word earned and assuming the credit applies to anyone below a certain income level regardless of employment. In reality eligibility depends on both income level and the presence of earned income. Remember also that the credit is refundable, which means it can create a refund even when tax liability is low, a feature that distinguishes it from non refundable credits.
Final Answer:
The Earned Income Tax Credit EITC is a refundable tax credit designed to benefit eligible low and moderate income individuals and families who earn income from work and file an income tax return.
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