Advanced Earned Income Credit
The Advance Earned Income Credit (Advance EIC) represented an early distribution of the Earned Income Credit, specifically offered to employees who completed form W-5, known as the Earned Income Credit Advance Payment Certificate.
Eligible employees traditionally received their Earned Income Tax Credit (EIC or EITC) from the federal government after the completion of their annual tax return. The Advance Earned Income Credit, however, established a mechanism for employees to access a portion of that credit in advance through their regular paychecks. Employers facilitated these advance credit payments by deducting from federal income, Social Security, and Medicare taxes withheld from employees’ wages.
The history of the Advance EIC traces back to the inception of the Earned Income Credit in 1975, designed to provide financial support to low-income working families with children, promoting workforce participation as an anti-poverty measure. Recognizing the potential benefits of periodic payments over a once-a-year lump sum, an advanced payment option was introduced in 1978 for families expecting to qualify for the tax credit.
However, the Advance EIC policy faced challenges due to insufficient awareness among eligible employees and employers, misconceptions about repayment obligations, and a preference among some individuals for a lump-sum refund over smaller periodic payments.
In 2010, under the Obama administration, the Advance EIC option was repealed. The administration concluded that the positive impact of the program was relatively insignificant, as less than 3% of eligible taxpayers were utilizing the benefit. Administrative problems and high non-compliance rates, with over 80% of recipients found to be non-compliant with program requirements, further contributed to the decision. For instance, a significant number of recipients from 2002 to 2004 lacked a valid Social Security number (SSN).
Following the repeal, no direct replacement for the Advance EIC option was implemented. Nevertheless, the Earned Income Credit persists, ensuring that eligible taxpayers, particularly those in working low-income families, still receive financial support through a lump sum during the regular tax return process, as opposed to incremental supplements to their paychecks.