Advanced Earned Income Credit

What is Advance Earned Income Credit? 

The keyword in Advance Earned Income Credit is “advance.” When it was in effect, advance earned income credit was the early bestowal of earned income credit to employees who have duly accomplished Form W-5, an IRS form called the Earned Income Credit Advance Payment Certificate. 

Earned Income Tax Credit (EITC/EIC) is a tax credit to help working individuals whose earned income is below a certain level, considered low income. Eligibility depends on several factors including income and the size of the family. For employees who were deemed eligible, they received their Earned Income Tax Credit (EITC/EIC) from the federal government after they filed their tax return. 

Advance Earned Income Credit allowed employees to receive a part of their Earned Income Tax Credit in advance via payroll processing through credit payments from federal income, Social Security, and Medicare taxes withheld from the employees’ wages. 

When did Advance Earned Income Credit begin?

Established in 1975, Earned Income Credit was designed to assist working individuals with children whose earned income was considered on the low-income bracket. Having Earned Income Credit was seen as an alternative to government welfare and was a way to encourage people to work.

The Advance Earned Income Credit program began in 1978. Rather than waiting for a lump sum that was given once a year, working individuals can opt to have advanced Earned Income Credit payments given throughout the year.  

What were some of the challenges of the Advance Earned Income Credit program?

The Advance Earned Income Credit benefit faced other administrative problems and errors in compliance. According to The General Accountability Office or The Government Accountability Office, 80% of people who were using the Advance Earned Income Credit were found to be non-compliant with one of the standard requirements of the program. 

Only a fraction of eligible taxpayers took advantage of the Advance Earned Income. Some employees had a misconception that they had to give back what was advanced to them by the time they filed their tax returns. Others preferred a lump-sum payment. 

When did Advance Earned Income Credit end?

The Advance Earned Income Credit was repealed under President Barack Obama in 2010. Recipients were no longer able to claim Advance EIC after December 31, 2010. Based on the administration's evaluation, the program did not make a big impact as a benefit since it was used by less than 3% of eligible individuals. 

Once it was repealed, working individuals from low-income families still received Earned Income Credit. However, this tax credit will be received through a lump-sum payment every year. The government no longer offered advances on Earned Income Credit.