The Role of Earned Income Tax Credit in the Budgets of Low-Income Households

Abstract

The annual receipt of large tax refunds, primarily due to the Earned Income Tax Credit (EITC), provides households with unusual opportunities to pay old bills and build assets. To examine these opportunities, the study surveys 194 black, Latino, and white parents who received EITC refunds of at least $1,000; in-depth interviews followed 6 months later. The majority of households (57 percent) report that they planned to allocate a considerable portion of their refund to savings, and 39 percent are estimated to accomplish their goal. Although 72 percent of the sample planned to pay bills and debt with the refund, 84 percent are found to do so. The results also suggest that households often readjust planned allocations to meet emergencies, debt, and bills. Despite setbacks, many recipients have significant asset accumulation goals, which they say are fueled by the expectation of ongoing annual tax refunds.