California’s Refundable Income Tax Credits: $1.4 Billion for Californians With Low Incomes

Every Californian deserves to be able to put food on the table, pay the rent, and support their families. Still, millions of people across California struggle to afford basic needs every day. California’s high cost of living has long been a challenge for state residents, but it has grown more acute in recent years, particularly for families and individuals with low incomes, due to persistently high inflation and housing costs. And while state leaders have made progress boosting workers’ earnings by raising the minimum wage and pay in specific industries, many jobs still fail to pay enough to cover essential expenses. In the face of these challenges, refundable income tax credits play a vital role in helping Californians with low incomes make ends meet.

Refundable income tax credits are proven tools for improving people’s economic security. For decades, the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) have provided hundreds or thousands of dollars in tax refunds to families and individuals with low incomes, helping them pay for food and other basic needs, and lifting millions of people out of poverty each year. These credits have also been linked to long-term benefits for children, including better health and school achievement, higher educational attainment, and increased employment and earnings when children become adults. Given these benefits, many states have state versions of these credits to enhance the positive effects of tax credits for state residents.

California’s Refundable Income Tax Credits Provide Around $1.4 Billion Annually

California has three refundable income tax credits that help families and individuals with low incomes make ends meet. Collectively, these credits have provided around $1.4 billion annually to Californians in recent years. This is up significantly from just $200 million provided in 2015, when California established its first refundable credit. This substantial growth reflects a decade of progress in which state policymakers consistently expanded financial support to families and individuals with low incomes through refundable state income tax credits.

California’s three refundable income tax credits include:

• The California Earned Income Tax Credit (CalEITC)
• The Young Child Tax Credit (YCTC)
• The Foster Youth Tax Credit (FYTC)

The California Earned Income Tax Credit (CalEITC)

Established in 2015, the CalEITC provides a credit to workers and their families who have annual earnings of about $32,000 or less. The amount of money the credit provides varies based on how much workers earn and how many children they support. The credit has benefited around 3.5 million tax filers annually in recent years, up significantly from fewer than 400,000 tax filers in tax year 2015.

In addition, more than 200,000 tax filers who file their taxes with Individual Taxpayer Identification Numbers (ITINs) have benefited from the CalEITC each year since tax year 2020, when California ended the exclusion of these filers.¹ITINs are issued by the Internal Revenue Service (IRS) to individuals who do not have Social Security Numbers to use to file their personal income taxes. Nearly 6 million people benefit from the CalEITC when factoring in not just the tax filer who qualifies for the credit but also their spouse/partner, children, and other dependents.

The Young Child Tax Credit (YCTC)

Established in 2019, the YCTC provides a credit to families who have at least one child between the ages of 0 and 5 and have annual earnings of about $32,000 or less, including those with no earnings. Most eligible families receive the maximum credit – $1,154 per family in tax year 2024. The credit has benefited around 400,000 families each year since it was first established. More than 35,000 families who file taxes with ITINs have benefited from the credit each year since California ended the exclusion of ITIN filers from the credit in tax year 2020.

The Foster Youth Tax Credit (FYTC)

Established in 2021, the FYTC provides a credit to workers ages 18 to 25 who were in foster care on or after their thirteenth birthday and are eligible for the CalEITC. The credit is provided per eligible individual, and most individuals receive the maximum credit – $1,154 in tax year 2024. The credit benefited nearly 5,700 tax filers in tax year 2023, up from nearly 4,900 in its first year.²The Franchise Tax Board does not report the number of tax filers using ITINs who benefit from this credit.

California’s Refundable Tax Credits Help People in Poverty Meet Basic Needs

California’s refundable income tax credits provide a much-needed source of cash to families and individuals living in poverty that can help cover the cost of basic expenses. While these credits are available to tax filers who earn about $32,000 or less, many who benefit from these credits have much lower incomes. For example, about 60% of tax filers who receive the CalEITC and YCTC and three-quarters of those who receive the FYTC earn $20,000 or less. The FYTC particularly benefits eligible filers with extremely low incomes. About 40% of tax filers who receive this credit earn $10,000 or less.

The YCTC is California’s only refundable tax credit that is available to families without any earnings from work at all. However, only about 1% of all recipients who claimed the credit in tax year 2023 – around 3,500 families – had no earned income.

California’s Refundable Tax Credits Promote Racial Equity

California’s refundable income tax credits help to promote racial equity by boosting the incomes of low-paid workers who, because of systemic racism past and present, are disproportionately people of color. An estimated 79% of Californians who are likely eligible for the CalEITC and 84% of Californians who are likely eligible for the YCTC are people of color, compared to 64% of Californians as a whole.

Specifically, among individuals eligible for the CalEITC, 58% are Latinx, 11% are Asian/Pacific Islander, and 6% are Black.³Due to data limitations, further disaggregation by race and ethnicity is not available. In addition, estimates for Californians eligible for the FYTC are not available. Among Californians who are likely eligible for the YCTC, 64% are Latinx, 8% are Asian/Pacific Islander, and 7% are Black. This stands in stark contrast with other state and federal tax benefits that are largely available to people with high incomes and wealth and are disproportionately white.

California’s Refundable Tax Credits Lay a Solid Foundation for Young Adults’ Economic Security

Workers under age 25 are disproportionately likely to struggle to afford basic needs, and yet, the overwhelming majority of them are excluded from the federal EITC.⁴Workers ages 18 to 24 as well as those age 65 or older who are not supporting children in their homes have historically been excluded from the federal EITC (with one exception for certain young adult students in 2021). This makes California’s refundable income tax credits an especially important source of support for young adults just beginning their careers. About 1 in 4 workers who receive the CalEITC — roughly 827,000 tax filers in total — and the vast majority of workers who benefit from the FYTC (84%) are under age 25. Additionally, roughly half of workers who benefit from the CalEITC (about 1.8 million people) and nearly two-thirds of those who benefit from the YCTC (268,000) are under age 35.

More is Needed: Refundable Tax Credits Prove California Leaders Have Tools to Combat Poverty

Over the past decade, state leaders have made significant progress in expanding cash support for Californians with low incomes through refundable state income tax credits. Providing about $1.4 billion in cash refunds to families and individuals in poverty is a milestone worth celebrating. But state leaders must not stop here. They must continue building on the past decade of progress until every Californian can meet their basic needs. In the coming years, state policymakers should continue to strengthen and expand California’s refundable income tax credits, increase the amount of cash support they provide, extend them to additional families and individuals with low incomes, and take advantage of all opportunities to connect Californians to free tax filing services so they reap the full benefits of the credits they are owed.

*The following narratives were compiled by Golden State Opportunity as part of the CalEITC+ education and outreach program, with participant names modified to preserve confidentiality and protect their privacy.

Nishi Nair contributed to this publication.