Giving Up on the Advanced Earned Income Tax Credit

By :: March 4th, 2009

President Obama’s budget would eliminate a small but meaningful program for low-income families – the Advanced Earned Income Tax Credit (AEITC). A far better idea would be to expand the program. This credit allows eligible families to receive a portion of their Earned Income Tax Credit (EITC) throughout the year through a reduction in tax withholding, so they don’t have to wait until they file their tax returns to get the extra cash. In 2009, the program could boost a family’s take-home pay by up to $35 a week.

True, few eligible families—three percent at most-- take the advanced credit, but is that really a reason to trash it? Low-income families face liquidity constraints that could be reduced – at least partly – by receiving the EITC throughout the year, rather than as a lump sum when they file their taxes. Stephen Holt, an EITC expert, finds that though many eligible individuals say they prefer a lump-sum payment, they often pay for a refund-anticipation loan so they can get the money as quickly as possible . That suggests that timeliness matters to them.

And, as pointed out by Joann Weiner in Tax Notes (February 16, 2009) – expanding the AEITC would be ready-made stimulus (albeit small). The program benefits only families with income below roughly $35,000 if they have one child or $40,000 if they have more. Since it’s also doled out in small chunks, it seems likely that any payments made via the AEITC are spent quickly. And isn’t this exactly what the doctor ordered for the economy?

OMB Director Peter Orszag says that the program does not work well. OK, why not fix it and increase the number of takers instead of, as the administration’s new plan would do, precipitate  a painful decrease in their take-home pay – just when they’re trying to figure out how to make ends meet?  AEITC came under fire in a 2007 GAO report, but that study raises many questions about the amounts received by recipients that have not yet been answered. On balance, it’s unclear if we really know enough about the program to abolish it. And no study has examined how the AEITC benefits users. Shouldn’t that figure heavily into the decision-making process?

Some steps the IRS could take toward fixing the credit would be to improve awareness – of both employers and workers – about the program and its requirements. Lack of awareness is an oft cited reason for why people don’t receive it and might also contribute to reporting errors among those who do.  Advocates and potential recipients could also be educated about the benefits of a steadier income stream in alleviating household stresses. Low-income households say they prefer receiving the credit as a lump-sum, but the sour economy may have changed that preference. If the administration does decide the AEITC just can’t work, perhaps it could hold its horses at least until the recession ends. This proposal has poor timing written all over it.

Most families currently getting the AEITC would also benefit from Making Work Pay. But Making Work Pay would offset less than half of the potential decrease in their take-home pay. That new credit is being distributed through reduced withholding. If the administration can get Making Work Pay out quickly and relatively accurately, why can’t it do the same for low-income families through the AEITC?

9Comments

  1. Anonymous  ::  4:52 pm on March 5th, 2009:

    The AEITC and advance Child Tax credit are important provisions which would make transition to a VAT/Simplified Income Tax easier, since they approximate the necessary prebate.

  2. Anonymous  ::  11:11 pm on August 1st, 2009:

    I personaly do not like this AEITC…..10 dllrs extra dont do nothing for my fam. I feel that we would do a lot more getting the EITC all together.Do we have a choice on this or what?

  3. Anonymous  ::  7:08 pm on September 2nd, 2009:

    The taxes are so annoying these days. We actually have to pay more taxes then the money we remain with. While I was working at Cincinnati movers company I managed to experience a few things like that.

  4. Anonymous  ::  8:12 am on September 12th, 2009:

    Hi ,
    Thanks for writing such an interesting article. It’s really good to know about the heating and air conditioning in detail. Whether it’s staying warm or keeping cool, every home depends on indoor climate control for comfort. An HVAC contractor is an important aspect of keeping your heating and cooling systems running smoothly. An HVAC contractor installs, maintains and repairs heating, ventilating, and air conditioning systems and related equipment. The right
    Dallas HVAC contractor is as essential to the success of your system’s function as buying the proper equipment.
    It should be a simple task to find a good
    Dallas HVAC contractor. Yet the simple fact is that a lot of people don’t have any idea what they should be looking for when they need to find a knowledgeable HVAC contractor. You need to find a dependable HVAC contractor that can give you quality installation and dependable follow-up service, whether for a new system or repairs on an existing one.
    Thanks,
    -Sarah Clark

  5. Anonymous  ::  7:14 am on September 15th, 2009:

    Hi ,
    Thanks for writing such an interesting article. It’s really good to know about the home packagers and movers in detail. One in four people in this country move every year. That’s an astounding forty two million people on the move. The average person will move many times within their life. Studies have shown that moving ranks as the third most stressful time in life. Even though we may be excited about the move, there can be mixed emotions about leaving behind a familiar neighborhood, close friends and fond memories. On top of all this we don’t want to have the added stress of wondering if the Cincinnati moving company is going to handle our possessions with care.
    The entire process will be a lot easier if you can find a reliable Cincinnati movers company, though this might not always be as easy as it seems. It’s not just a matter of picking up the phone book and searching under “moving companies”. Moving companies can be quite diverse in the services they provide. Some companies may only work locally while others are national or even global. So the type of move you are planning and even what you need to move will determine the type of Cincinnati moving company you’ll need to hire.
    Thanks,
    – Sarah Clark

  6. Anonymous  ::  12:37 pm on October 21st, 2009:

    Yes – it's too early to give up on the Advance Earned Income Tax Credit or AEITC. The GAO study left many unanswered questions. For one, the IRS could do much more to publicize AEITC so that individuals have specific knowledge whether they qualify for AEITC. For example, at http://www.eitc.irs.gov, there's an EITC calculator, which allows taxpayers to calculate EITC. Why hasn't the IRS included an AEITC calculator???? Also, why can't individuals apply for AEITC using a w-4 rather than a separate W-5 that no one has easy access to? The GAO study did not address any of these issues.
    AEITC means more money for recipient families – it reduces the need for families to rely on expensive credit. It also offers families the opportunity to save on their own, pocketing the interest.
    Giving up on AEITC is bad policy. Low-income families and advocacy groups should unite to fight this.

  7. Anonymous  ::  9:29 pm on February 1st, 2010:

    The terminology in this article is apt. To propose an increase in the number of “takers” is probably one of the best descriptions of what this administration is trying to do on every possible level. We work for our money and pay taxes on it but we are less than $60,000 a year combined. The idea that my lazy, druggy nieces will get $3,000 to $5,000 in EITC for being the slobs that they are, simply because they accidentally popped a kid or two out between binges, sickens me to the core. We need to do away with the entire program not just the tiny little part of it that Obama is trying to sell as a major change. Welfare, foodstamps, etc., are best administered at a State level. The Federal government does not have a constitutional authority to take our money at the point of a gun and redistribute it to ANYONE, no matter how much that other person NEEDS the money.

  8. Anonymous  ::  8:28 pm on July 26th, 2010:

    Yeah, I agree that awareness is the key. I worked for some TN movers a while back and it just seemed like taxes were a huge piece of my check – plus all the other items they deducted.

  9. Anonymous  ::  9:26 pm on July 28th, 2010:

    This is sad to hear a lot of people rely on this and we need it, I still say to fix the economy we should had giving all the home owners $100,000 instead of bailing out all these companies.
    I am a Pittsburgh contractor and could have used a bail out but no.