To help offset the cost of a temporary increase in funding for Medicaid and state education in the recently enacted 2010 Education and Jobs Act, the new law contains a revenue raising provision affecting the earned income tax credit (EITC). The new law provides that, starting next year, eligible low- and moderate-income workers who qualify for the EITC will no longer be able to elect to receive the credit in advance. Here are the details.

The EITC is a refundable tax credit for low- and moderate-income workers and families. “Refundable” means that if you're eligible, the credit not only reduces the tax that you may owe but also may result in IRS sending you a refund if the amount of the credit exceeds the amount of taxes owed. The amount of the credit depends on the taxpayer's earned income and the number of qualifying children, if any. The credit is gradually reduced or phased out above certain income levels. And the credit isn't available at all to a taxpayer with investment income above specified amounts (for 2010, $3,100). For tax year 2010, a claimant with no qualifying children can receive a maximum credit of $457, a claimant with one qualifying child can receive a maximum of $3,050, a claimant with two qualifying children can receive a maximum of $5,036, and a claimant with three or more qualifying children can receive a maximum of $5,666.

Under pre-Education and Jobs Act law, for a taxpayer with at least one qualifying child, there were two ways he could claim the credit. The taxpayer could get it all at once when he filed his tax return the following year. Or, he could elect to request advance payments of a portion of the EITC throughout the year by having his payments of withheld income reduced by his employer. The advanced EITC payment option, however, was not popular and only about three percent of eligible EITC recipients chose it, despite repeated efforts by IRS over the years to increase participation. The new law eliminates the advanced EITC payment option, starting in 2011, with the expectation of raising $1.131 billion over 10 years.

We hope this information is helpful. If you would like more details about this change or any other aspect of the new law, please do not hesitate to contact us.