Advance Earned Income Credit Repealed Beginning in 2011

President Obama has signed H.R. 1586, the Education, Jobs and Medicaid Assistance Act, into law. The Act includes a provision that repeals the advance earned income credit (AEIC), beginning in 2011.

The earned income credit (EIC) is a tax credit available to low-income employees. The credit reduces tax owed and is intended to offset living expenses and Social Security taxes paid. Eligible employees may either claim the whole credit on their federal personal income tax return, in which case it will be paid out in a lump sum by the federal government, or they may choose to receive the credit in advance with each paycheck (advance earned income credit) by filing Form W-5, Earned Income Credit Advance Payment Certification, with their employer. The amount advanced depends on the employee’s earnings in the pay period, and is determined from IRS tables. The advance payment is then reported on the employee’s Form W-2 as a separate item.

The President’s fiscal year 2010 budget included a proposal to eliminate the AEIC because it has been extremely unpopular among eligible taxpayers. An August 2007 Government Accountability Office report found that, at most, only 3% of eligible individuals participated in the AEIC program. IRS efforts to increase participation in the program have not had a meaningful impact. The President’s office believes that repealing the AEIC will have little effect on individuals.