What Does EITC Advance Amount Mean?
Understand what the EITC advance amount referred to historically and how the Earned Income Tax Credit is claimed today.
The Earned Income Tax Credit (EITC) is a refundable tax credit designed to provide financial support for low-to-moderate income working individuals and families. This credit aims to reduce tax liability and can result in a refund for eligible taxpayers. While the EITC remains an important benefit, the concept of an “advance amount,” which allowed recipients to receive a portion of their credit throughout the year, is no longer available.
The Former EITC Advance Payment Program
The EITC Advance Payment Program was established in 1978 to provide eligible low-income workers with financial assistance throughout the year, rather than as a single lump-sum refund after filing their annual tax return. Employees who expected to qualify for the EITC could elect to receive advance payments directly through their paychecks.
To participate, an employee would submit Form W-5, Earned Income Credit Advance Payment Certificate, to their employer. Employers were then responsible for including a portion of the anticipated EITC amount in the employee’s net pay.
Discontinuation of Advance Payments
The EITC Advance Payment Program was discontinued after December 31, 2010. This change was implemented as part of the Education Jobs and Medicaid Assistance Act of 2010, due to several contributing factors.
One significant reason was the low participation rate, with less than 3% of eligible taxpayers utilizing the advance payment option. Many eligible workers were either unaware of the program or found the process of applying for it through their employer too complex. Additionally, the program faced administrative problems and issues with non-compliance.
Studies indicated that a high percentage of advance EITC recipients, some estimates suggesting over 80%, were found to be in violation of at least one program requirement. This often resulted in unexpected tax liabilities at the end of the year if taxpayers had received more advance credit than they were ultimately entitled to. The administrative burden on employers to track and distribute these payments also added complexity to payroll processes.
Claiming the EITC Now
Currently, the EITC is exclusively claimed when an eligible taxpayer files their annual federal income tax return. Taxpayers must use Form 1040, U.S. Individual Income Tax Return, and if they have a qualifying child, they must also attach Schedule EIC, Earned Income Credit. The credit first reduces any tax liability owed, and if the EITC amount exceeds the taxes due, the remaining balance is issued as a refund.
To qualify for the EITC, individuals must have earned income and their adjusted gross income must fall below specific limits, which vary based on filing status and the number of qualifying children. All individuals listed on the tax return, including the taxpayer, their spouse if filing jointly, and any qualifying children, must possess a valid Social Security number that permits employment. The taxpayer must be a U.S. citizen or resident alien for the entire tax year and cannot be claimed as a dependent on someone else’s return.
Those without a qualifying child must meet age requirements, being at least 25 but under 65 years old. Investment income must also be below a certain threshold for eligibility. Even if a taxpayer does not owe any federal income tax, they must still file a tax return to claim the EITC and receive their refund. Refunds for returns claiming the EITC are issued after mid-February due to the Protecting Americans from Tax Hikes (PATH) Act, which aims to prevent fraud.