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Tax Credit Is No-Cost Pay Hike
GRAND RAPIDS — Local employers can increase the financial well-being of many of their lower income workers by raising the employees’ take-home pay — and it won’t cost the businesses a cent.
In fact, those payments are subtracted from a company’s payroll taxes.
The federal Advanced Earned Income Tax Credit (AEITC) program accomplishes that and gives an employee what effectively becomes a wage hike, up to $4,536 for tax year 2006. For 2007, the hike will rise to $4,716. A worker gets that pay boost through the Earned Income Tax Credit (EITC).
According to the Internal Revenue Service, AEITC is a refundable credit for qualified workers intended to help offset some of the increases in living expenses and Social Security taxes. The credit reduces the amount of tax workers owe and may result in a refund to the taxpayer. And the payout is pretty significant.
Twenty-two million Americans were provided $34 billion in EITC cash assistance in 2003. The following year the cash assistance topped $36 billion. In 2005, it reached more than $41 billion, but dipped to $39 billion last year. The Department of Treasury said 628,016 Michigan workers received more than $1.1 billion last year from EITC through last June.
EITC has been called the nation’s “largest poverty reduction program” for lower-income workers, but not everyone is aware of it.
“The program is the largest means-tested benefit program in the country. It lifts millions out of poverty every year,” said IRS Commissioner Mark Everson.
Everson, though, added that up to a quarter of employees who are EITC eligible don’t apply for the credit. And workers don’t have to wait until filing time to collect it, as the tax credit can be part of their paychecks.
In a nutshell, an employee’s earned income and adjusted gross income determine whether a worker is qualified to participate in the AEITC program. Here are the parameters for the next tax year, 2007:
**With two or more qualifying children, an employee’s earned income and adjusted gross income must be less than $37,783, or $39,783 if married and filing jointly.
**With one qualifying child, it’s $33,241, or $35,241 if married and filing jointly.
**With no qualifying children, it’s $12,590, or $14,590.
**Investment income must be less than $2,900 for the year.
A child must meet certain age, relationship and residency tests; IRS Publication 596, Earned Income Credit, outlines those and includes a simple eligibility checklist to help an employee determine if he or she qualifies for the credit.
A qualifying child must be under the age of 19 — 24 if a full-time student — or permanently disabled, and must have lived with the worker for more than half of the tax year.
Researchers for the National Bureau of Economic Research reported the credit had the most benefit for single working mothers, and that it encouraged more individuals to join the work force than any other federal assistance program.
“The cost of the EITC is offset in part, they note, by a reduction in the number of single mothers receiving welfare. Moreover, the EITC now lifts more children out of poverty than any other government program. In 2002, it removed 4.9 million people, including 2.7 million children, from poverty,” said David Francis of the NBER.
“Advocates see it as promoting the values of family and work. Traditional welfare programs, according to their critics, do the opposite,” he added.
Employees should obtain a copy of IRS Form W-5, the Earned Income Credit Advance Payment Certificate, if they want to participate in a company’s AEITC program. Qualification factors and specific requirements are explained on the certificate. Detailed information is available in Publication 596, which can be found online at www.irs.gov
The state also has online information at www.michiganeic.org; the site also can help qualified employees with free tax preparation services.
Business owners report their employee payments on the advance EITC line of their employment tax returns: Form 941, Form 943 or Schedule H of Form 1040. The amount reported can be subtracted from the total employment taxes. IRS Publication 15 has the instructions on how to do this.