Refundable tax credits (RTC) differ from other credits because a taxpayer is able to receive a refund check from IRS for the amount their credit exceeds their tax liability. For example, a person who owed $2,000 in taxes, but qualified for $3,000 in EITC would receive a $1,000 refund from IRS. A nonrefundable credit can be used to offset tax liability, but any excess of the credit over the tax liability is not refunded to the taxpayer. If, instead of claiming the EITC, that same person claimed $3,000 in a nonrefundable credit, the person would use $2,000 to reduce the tax liability to zero, but would not receive the remaining credit amount as a refund. According to the Congressional Budget Office (CBO), the number and costs associated with refundable tax credits have varied over the past 40 years. The first refundable credit, the EITC, was enacted in 1975. In 1998, additional RTCs became effective and by 2010 there were 11 different refundable tax credits. The cost of refundable tax credits peaked in 2008 at $238 billion, but declined over the next 4 years because of the expiration of several credits designed to provide temporary economic stimulus. Starting in 2014, the refundable Premium Tax Credit (PTC) was made available to some low-income households for the purchase of health insurance through newly created exchanges, as part of the Patient Protection and Affordable Care Act (PPACA). According to estimates from the Joint Committee on Taxation (JCT) and CBO, the cost of the PTC in its first year was $35 billion and will be about $110 billion by 2021. In 2015, there were five refundable credits in effect. Four of those were available to individuals—the EITC, ACTC, AOTC, and PTC. We issued a report last year assessing IRS’s implementation of PPACA requirements, including efforts to verify taxpayers’ PTC claims. This report focuses on the design and administration of the other three refundable tax credits available to individuals. Congress enacted the EITC in 1975 to offset the impact of Social Security taxes on low-income families and encourage low-income families to seek employment rather than public assistance. The credit was also meant to encourage economic growth in the face of a recession and rising food and energy prices. Since the credit’s enactment, it has been modified to provide larger refunds and differentiate between family size and structure. In fiscal year 2013, taxpayers received $68.1 billion in EITC; an average amount of $2,362 was distributed to about 29 million taxpayers. Beginning in 1979, the credit was also available as an advance credit. This meant that filers had the option to receive their predicted credit in smaller payments throughout the preceding year and reconcile the amount received with the amount they were actually eligible for upon filing their taxes. However, as we reported, the advanced payment option had a low take-up rate of 3 percent and high levels of noncompliance (as many as 80 percent of recipients did not comply with at least one of the program requirements), which led to its repeal in 2010. The EITC divides the eligible population into eight different groups based on the number of eligible children claimed by the filer and filing status. The basic structure of the credit remains the same for each group: the credit phases in as a percentage of earned income; upon reaching the maximum benefit, the credit plateaus; and when income reaches a designated point, the benefit begins to phase out as a percentage of income. The phase-in and phase-out rates, maximum benefit, and phase- out point all differ depending on filing status (such as single or married filing jointly) and the number of eligible children claimed. In order to claim the EITC, the tax filer must work and have earnings that do not exceed the phase-out income of the credit. Additional eligibility rules apply to any children that a tax filer claims for the purpose of calculating the credit. A qualifying child must meet certain age, relationship, and residency requirements. For example, the child must be younger than 19 (or 24 if a full-time student) and be a biological, adopted, or foster child, grandchild, niece/nephew, or sibling of the filer and live with the filer in the United States for at least 6 months of the year. Additionally, the child must have a valid Social Security number (SSN). The Improper Payments Information Act (IPIA) of 2002, as amended, requires federal agencies to review programs and activities that may be susceptible to significant improper payments and report on actions taken to reduce improper payments. In addition, the Office of Management and Budget (OMB) identifies high-priority (or high-risk) programs, one of which is EITC, for greater levels of oversight and review. For fiscal year 2015, IRS estimated that, $15.6 billion—or 23.8 percent—of EITC program payments were improper. The estimated improper payment rate for EITC has remained relatively unchanged since fiscal year 2003 (the first year IRS had to report estimates of these payments to Congress), but the amount of improper EITC payments increased from an estimated $10.5 billion in fiscal year 2003 to nearly $16 billion in fiscal year 2015 because of growth in the EITC program overall. The Additional Child Tax Credit (ACTC) is the refundable portion of the Child Tax Credit (CTC) and provides tax relief to low-income families with children. It also adds to the positive reward the EITC provides to those who work. The credit was initially created in 1997 by the Taxpayer Relief Act of 1997 as a nonrefundable child tax credit for most families, but in 2001 was expanded to include the current refundable ACTC for which more low-income families were eligible. Like the EITC, taxpayers can use the child tax credits to both offset tax liabilities (CTC) and receive a refund (ACTC); however, unlike the EITC, the nonrefundable CTC and the refundable ACTC amounts are entered separately on the Form 1040. In fiscal year 2013, taxpayers claimed $27.9 billion in ACTC and $27.2 billion in the nonrefundable CTC. Thus, the total revenue cost of the CTC and ACTC was $55.1 billion. This report will sometimes combine these credits (referring to them as CTC/ACTC) when their combined effect is at issue or to facilitate comparison with other RTCs that do not break out refundable and nonrefundable components. In general, the ACTC is claimed by those with lower tax liabilities and lower income than those that claim only the CTC. As reported by the SOI Division of the Internal Revenue Service, in 2012, 88 percent of the ACTC went to taxpayers with adjusted gross income below $40,000, while 17 percent of the CTC went to taxpayers below that income. Under current law, taxpayers can use the CTC to offset their tax liabilities by up to $1,000 per qualifying child. If the available CTC exceeds the filer’s tax liability, they may be able to receive a portion of the unused amount through the refundable ACTC. The ACTC phases in at 15 percent of every dollar in earnings above $3,000 up to the unused portion of the CTC amount. To claim the CTC or ACTC, taxpayers must have at least one qualifying child. The criteria for qualifying children are slightly different from that used to determine eligibility with the EITC. For the CTC and ACTC, the child must be under the age of 17 and a U.S. citizen, national, or resident, but taxpayers file using either a SSN or individual taxpayer identification number (ITIN). However, the relationship and residency requirements are similar for the ACTC and EITC. See figure 1 for a description of the credits and their requirements. The American Opportunity Tax Credit (AOTC) offsets certain higher education related expenses in an effort to lessen the financial burden of a college or professional degree for taxpayers and their dependents. The credit was created by the American Recovery and Reinvestment Act of 2009 as a modification of the nonrefundable Hope Credit and was made permanent in 2015 with the Protecting Americans from Tax Hikes (PATH) Act. In 2013, taxpayers claimed $17.8 billion in AOTC. The AOTC is designed as a partially refundable credit. The entire credit is worth up to $2,500 and a taxpayer can receive a refundable credit equal to 40 percent of their credit (for a maximum of $1,000). The size of the entire credit is determined by taking 100 percent of the first $2,000 in qualified education expenses and 25 percent of the next $2,000 in qualified expenses, which include tuition, required enrollment fees, and course materials. The value of the limit on expenses qualifying for the credit is not indexed for inflation. In order to claim the AOTC a tax filer or their dependent must meet certain requirements including adjusted gross income requirements. Furthermore, they must be in their first 4 years of enrollment and be at least a half-time student at an eligible post- secondary school. Taxpayers may only claim the AOTC for 4 years. More taxpayers claim the EITC than the other two refundable credits we examine in this report. The EITC is also the most expensive in terms of tax revenue forgone and refunds paid. In 2013, taxpayers claimed a total of $68.1 billion in EITC with $59 billion (87 percent) of this amount refunded; the total was $55.1 billion for the CTC and ACTC with $26.7 billion (48 percent) refunded as ACTC and a total of $17.8 billion in AOTC with $5 billion refunded (28 percent).