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American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
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CCH® PAYROLL — 08/17/10

President signs repeal of advance EIC

The President has signed H.R. 1586 (P.L. 111-225), on August 10, 2010. The bill has no title. The advance payment option of the earned income tax credit (EITC) is repealed, effective for tax years after December 31, 2010. Separate withholding tables will no longer be necessary. Workers will no longer be able to receive an advance payment of the EITC through their employer. Individuals with positive tax liability will still be able to receive any non-refundable portion of the EITC during the year through adjustments in regular withholding, effective for taxable years beginning after December 31, 2010.

Background

Under the advance payment system, available since 1979, eligible taxpayers may elect to receive the credit in their paychecks, rather than waiting to claim a refund on their tax return filed by April 15 of the following year. This means that the taxpayer's paycheck is adjusted to include not only the nonrefundable portion of the EITC (i.e., by reducing otherwise applicable tax liability) but also a portion of the refundable EITC (i.e., an outlay rather than a reduction in otherwise applicable tax liability). The portion of the EITC eligible for advance payment is limited to 60 percent of the maximum EITC for one qualifying child. A taxpayer electing the advance payment option is required to file a tax return for the taxable year (regardless of the otherwise applicable filing thresholds) in order to reconcile any advance payment with the actual allowable EITC.

Beginning in 1993, Congress required the IRS to notify eligible taxpayers of the advance payment option, but participation in the advance payment option has remained limited to a small percentage of eligible taxpayers.

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