The advance earned income tax credit: IRS education effort picks up speed.

Under section 32 of the Internal Revenue Code, certain low-income individuals and couples may claim a refundable credit against the tax on their earned income. In addition, eligible taxpayers can receive the credit ratably throughout the year, by having their withholding adjusted. The Internal Revenue Service has undertaken to make more taxpayers aware of their eligibility for the earned income tax credit (EITC) and also to educate employers of their obligation to make the advance EITC available to their employees. To facilitate the IRSs educational effort, both the IRS and the Center on Budget and Policy Priorities have prepared a series of background materials on the EITC and advance EITC. The questions and answers below are drawn from their materials.

Although applications for the advance EITC (through the filing of Form W-5) are likely to be coordinated through a company's human resources (or personnel) department, the tax department may well play an important role in ensuring compliance with the law. Members of TEI should know that the IRS has appointed Taxpayer Education Coordinators in each district, who can assist businesses in making their employees aware of the EITC. Individuals wishing the name and telephone number of their local Taxpayer Education Coordinator should call their local IRS office or TEI Headquarters. In addition, this article can be duplicated and distributed freely throughout the workforce.

What Is the Earned Income Tax Credit?

The EITC is a special tax benefit for working people who earn low or moderate incomes. It has several important purposes: to reduce the tax burden on these workers, to supplement wages, and to make work more attractive than welfare. Workers who qualify for the EITC and file a federal tax return can obtain a refund of some or all of the federal income tax that was withheld from their paychecks during the year. They may also get extra cash back from the IRS. Even workers whose earnings are too small to have paid taxes can qualify the EITC. What's more, the EITC reduces any additional taxes workers may owe.

Who Can Get the EITC

and How Much Is It Worth?

* Single or married people who worked full or part time at some point in 1994 can qualify for the EITC, depending on their income.

* Workers who were raising one child in their home and had family income of less than 23,755 in 1994 can receive an EITC of up to $2,038.

* Workers who were raising more than one child in their home and had family income of less than $25,296 in 1994 can get an EITC of up to $2,528.

* Workers who were not raising children in their home but were between ages 25 and 64 on December 31, 1994 and had income below $9,000 can obtain an EITC of up to $306.

What is the Advance EITC?

Most workers receive the EITC in one large check from the IRS after they file a tax return. But there is another choice: Employers can add part of a worker's EITC to every paycheck, and the worker can qualify for the rest of the credit after filing a tax return. This is called "advance EITC payment."

In 1995, advance EITC payments are available to any worker with at least one qualifying child who expects 1995 income of less than approximately $24,395. The new credit for workers who are not raising children in their home is not available in advance payments.

What Are the Advantages

of the Advance EITC?

For many workers, getting part of their EITC in each paycheck can make a difference in paying the rent, buying groceries, and meeting other day-to-day needs. A worker earning between $650 and $915 a month can get about $50 extra in each biweekly paycheck. Employers also benefit from promoting advance EITC payments - they can help employees increase their take-home pay at no cost to the business. This can decrease turnover in the workplace.

The advance payment option has been improved. In the past, workers who chose the advance EITC option got payments in their paychecks equal to most or all of their EITC for the year. As a result, many workers decided against advance payments because they wanted a refund at tax time. Some also feared they would owe money back to the IRS after the end of the year. A new federal law makes advance EITC payment much more appealing. Workers who choose advance payment now receive a smaller portion of their EITC in their paychecks - approximately half of their EITC for the year. They get the rest as a refund when they file their tax return. This means workers can receive advance payments and a year-end refund. And, because workers receive only part of their EITC during the year, the risk of getting too much in advance and owing some back at the end of the year is much lower.

Should Some Workers Not

Choose the Advance EITC?

Yes. Advance EITC payments are based on the total income workers expect their families to earn in a year. Changes in income or family size during the year can decrease the EITC (and therefore the advance payments) for which workers are eligible. If a worker continues to receive advance payments based on an incorrect estimate of yearly income, these payments may exceed the amount of the EITC. In this case, the worker would have to send the IRS a check at tax time to make up the difference. The following workers should not use the advance payment option:

* Workers who hold more than one job * Workers with a working spouse * Workers who get married during the year * Workers whose earned income increases a lot during the year

How Does a Worker Sign Up

for the Advance EITC?

Getting advance EITC payments is not difficult. Eligible workers fill out a Form W-5, which is captioned "Earned Income Credit Advance Payment Certificate," and give the bottom part to their employer. The W-5 is available from employers or can be ordered free by calling 1-800-TAX-FORM.

Eligible workers can file a W-5 at any time during the year, but they must file a new W-5 at the beginning of each year to continue getting the EITC in their paychecks.

If workers are planning to get married or expect a large increase in income during the year, they should ask their employer to stop putting advance EITC payments in their paychecks. To do this, workers need to file a new W-5 with their employer indicating they do not want to receive advance payments anymore.

Workers who receive advance payments during the year must file a tax return after the end of the year and include the total amount received in advance payments. They must also complete Schedule EITC and attach it to their tax return.

Some Workers Are Not Eligible

to Receive Advance Payments

Some workers who are eligible for the EITC are not allowed to get advance payments, including workers without qualifying children, farmworkers who get paid day by day, and people with no Social Security and Medicare taxes withheld from their pay.

What Is the Employer's Role?

Advance payments do not cost employers money. Employers simply subtract the advance payments they have added to their worker's paycheck from what they would otherwise deposit with the IRS. Most employers with automated payroll systems can easily program advance payments into their systems.

Some employers may not be aware of the advance EITC payment option. But under federal law, any eligible employee who files a W-5 with an employer must be given advance payments. Employers are not required to make sure employees are eligible for the EITC; that is the employee's responsibility. For more information, employers should refer to the IRS Employer's Tax Guide, Circular E.

What Else Can Employers Do?

* Send information to all their employees. Both public and private sector employers can include an EITC envelope stuffer or brochure with workers' W-2 forms. EITC information can also be sent with employee paychecks in December, January, February, or March.

* Alert workers to the availability of advance EITC payments. Advance payment of the EITC increases the size of workers' paychecks at no cost to the employer.

* Include information in employee newsletters. For a sample newsletter article on the EITC, contact the Center on Budget and Policy Priorities (202/408-1080).

* Make information available at the worksite. Employers can leave flyers or hang posters near the time clock, in the staff lounge, or in office waiting rooms.

* Inform workers about state earned income credits. Currently, workers in Minnesota, New York, Vermont, and Wisconsin can get a refundable state EITC in addition to their federal EITC.

* Involve VITA. Employers with many low-wage employees can arrange for a free tax preparation clinic at the work site.

* Inform customers. Stores can stuff shopping bags with EITC flyers, utility companies can include EITC information with monthly bills.