“A short premier on the various things that can be done through the IRS, since it constantly comes up and it is important to understand the differences:
1) Tax Deduction: This reduces your income before the income is taxed. So if you have a $10,000 deduction, make $100,000 and pay a 33% tax rate, the deduction comes off the top so that you pay 33% of $90,000. Your taxes go from $33.33k to $30k, making the deduction worth $3,333 to you. In other words, a deduction is worth the nominal amount times your marginal tax rate (not effective tax rate, because it takes money off the top). A tax deduction helps only people who pay taxes, and helps the rich more than the poor (because they pay a higher marginal tax rate).
Famous tax deductions are the charitable donation tax deduction (in essence, any money you donate to charity is not counted as your income), and the mortgage interest deduction (any interest you pay on a mortgage is deducted from your taxes). For individuals, often you can "itemize" deductions (list them all out, and claim each one), or take the standard deduction (effectively going *shrug* just assume my deductions total $12k - but if you do this with rare exceptions you don't get to then claim individual deductions). In practice, if you have someone do your taxes they do it both ways and claim whichever gives you a bigger deduction.
In practice, tax deductions are generally argued for less on the basis of helping people and more about serving as a way to affect behavior (such as the mortgage interest deduction being thought to have increased home ownership; the exact effects in practice are of course debated).
2) Tax Credit (non-refundable): First - "non-refundable" isn't usually part of the name, but tax credits by default are generally non-refundable. A tax credit reduces your tax bill dollar for dollar. If I have a $10k tax credit, I make $100k, and I have the same 33% tax rate, my tax bill goes from $33.33k to $23.33k. A tax credit thus does not have the same effect where it's more valuable the richer you are and the higher marginal tax rate you pay.
However, if a tax credit is non-refundable, it is not useful to people who pay no taxes at all, or pay few enough taxes that they cannot use the full credit. Assume I make $20k and pay only a 10% tax rate. The same $10k tax credit reduces my taxes from $2k to $0 - but I lose the remaining $8k of benefit.
These kind of tax credits are obviously more valuable to individuals than tax deductions (even people who lose most of the credit benefit far more than a deduction of the same size) but the very poor are cut out from benefiting from them to the same extent. And usually, because these are non-refundable, you get the benefit only at tax time. If you're getting a refund anyway that will seem like the government is paying you because the tax credit will dollar-for-dollar increase your refund check, but in reality it's just reducing your overall tax burden and giving you back money you gave the government previously.
3) Refundable Tax Credit: A refundable tax credit fixes the problem in (2), that the tax credit does not help those that pay little or no taxes. The credit being "refundable" means that to the extent that the credit reduces the taxes you pay below $0, the government cuts you a check. So to take our $20k person from before: if they earn $20k, and pay a tax rate of 10%, they initially owe $2k in taxes. The $10k tax credit wipes out $2k, leaving their tax at $0. But the remaining $8000 is not lost - instead, the government cuts a check to the individual for $8k.
So, now that we understand all of those, why do refundable tax credits even exist? Why would you go through this process where they're applied to taxes first, instead of just sending out a $10k check to everyone and they pay $2k later on?
It's because of tax refunds. To avoid cheating on income taxes - which was rampant - virtually everyone in the US's employer withholds taxes from their paycheck, and sends them to the IRS. These are usually a little more than you actually owe, because of tax deductions, so you get a refund at tax time. In other words, every year the IRS sends out a check to a large portion of the united states population. No other agency distributes money on this scale.
So if you want to, say, send $1,400 to everyone in the country, you have two options. First, you can stand up an entirely new bureaucracy of Sending Checks To People which will take ages to get set up. Sending checks to hundreds of millions of people is hard work! That will take a lot of time, and a lot of money. Or: you can structure the $1,400 as a refundable tax credit to which everyone is entitled to (ignoring the income cutoffs for now). If you do that, you can distribute the money through the IRS - which already has the capability set up to make payments on that scale, has bank account information to do it automatically for a huge portion of the population. You're just using the same mechanism that tax refunds use - and nothing requires you to only use that method once a year at tax filing time. And, if you want, it's much easier to layer on a "no rich folks" restriction on the money by going through the IRS - but you'd be going through the IRS anyway even if you didn't.
Formally calling it a refundable tax credit instead of just a "direct payment" is a legal fiction to let you use pre-existing infrastructure. It's like encoding a data stream as a .mpeg file so you can use pre-existing cable video wiring.
So when people are posting about "tax credits" vs. "direct payments" - on a federal level, a direct payment is a refundable tax credit. That's just how you structure things so the federal government can make the payments. Now, if it's not refundable, if it's claimable only at tax time, or if it's a tax deduction - those can all be different things. But if you don't understand that the federal government's only real way to make direct payments to people is the IRS, you'll see things like "tax credit" and not realize what that means.
In some cases the feds use other infrastructure - for example, using state unemployment insurance to direct additional funds to unemployed people. That can, in some cases, be the right move, and in that case it won't be a tax credit. But that's just a choice made about the most effective way to get money from the federal treasury to someone's pocket, not really something inherently different compared to a refundable tax credit.” - evil weasel
