Advance Earned Income Credit

What Is the Advance Earned Income Credit?

Signed into law by President Gerald Ford, the Advance Earned Income Credit was a piece of U.S. legislation that provided employees with a portion of their Earned Income Tax Credit payment in advance.

Prior to this legislation, eligible employees would receive their Earned Income Tax Credit (EIC/EITC) from the federal government after they filed their federal income tax return.

After the Advance EIC became law, certain employees would be eligible to get some of that credit in advance through their paycheck once they completed form W-5 (the Earned Income Credit Advance Payment Certificate).

Employers would make these credit payments from federal income, Social Security, and Medicare taxes withheld from an employee’s wages.

The History of the Advance EIC

Earned Income Credit was established in 1975 as a way to provide financial assistance to low-income working families who had children. As an anti-poverty program that incentivized people to work, EIC was seen as an alternative to government welfare.

Some federal officials thought periodic payments would be better for these individuals rather than a once-a-year lump sum. So, in 1978, the Advance Earned Income Credit was introduced for families who anticipated qualifying for the tax credit.

However, the Advance EIC policy suffered from poor design. Very few people actually used the advance payment as a benefit. A report from 1992 by the General Accounting Office found three principal reasons why so few people used the Advance EIC:

• Many eligible employees and their employers were not aware of it as an option.
• Some employees thought they had to repay advances when they filed tax returns.
• Some employees preferred a lump-sum refund payment instead of smaller periodic payments.

When Was the Advance EIC Repealed?

The Advance EIC option was repealed in 2010 under the Obama administration. The administration felt the positive effects of the Advance EIC option were fairly insignificant since the benefit was used by less than 3% of eligible taxpayers.

The Advance EIC was also repealed because of administrative problems and non-compliance errors. The General Accountability Office found more than 80% of people receiving advance credit were actually non-compliant with at least one of the program’s requirements. For example, about 100,000 recipients from 2002 to 2004 may not have had a valid Social Security number (SSN).

What Replaced the Advance EIC Option?

There is currently no official legislation to replace the Advance Earned Income Credit option. However, the Earned Income Tax Credit (EITC) still remains. With this Earned Income Tax Credit, advance payment is not available. However, taxpayers will still receive a credit on their personal income taxes if they are part of a working low-income family. This credit will come in a lump sum rather than incremental supplements to their paycheck.