Created in 1975, this credit is unique because it is refundable. Unlike most credits, which can only reduce your income tax liability to “0”, if your Earned Income Credit exceeds your tax liability, including any self-employment tax or other taxes or penalties, “Sam” will send you a check for the difference. The EIC is treated as a tax payment, such as withholding or estimated taxes, on the 1040 and 1040A.
Below is the text of a commentary on the EITC I wrote for the ViewPoint column of the Winter 2006 issue of the National Association of Tax Professionals’ quarterly TAXPRO JOURNAL:
"While I do believe that the tax code can be used to encourage and facilitate such positive things as savings and investment, economic growth, and charitable contributions, I do not believe that the code should be used to “redistribute” income or as a form of welfare. I do not believe in refundable tax credits.
Let’s call a spade a spade. The Earned Income Tax Credit, especially its refundable feature, is a welfare program. I do believe I read somewhere that, in terms of dollars, it is the biggest federal welfare program in existence today. It is, for the most part, just another form of Aid to Families with Dependent Children.
I am not against tax relief for the working poor. I would support a form of earned income credit, or some other method, that could be used to zero-out the income tax liability of low-income workers. I am also not against the concept of providing aid to families with dependent children, or other types of welfare programs for the working poor. I just believe the two concepts should not be combined in the tax code.
The EITC does not provide the safeguards, checks, and balances required in other federal and state welfare programs necessary for responsible fiscal management. As a result, it is perhaps the most abused provision of the tax code. Studies have suggested that close to 30% of all EITC claims are erroneous.
I’m sure we have all had EITC clients who we learned after-the-fact, or strongly suspected, had sufficient unreported income to make them ineligible for the credit. Hasn’t each one of us, at one time or another, had as a client the single parent with a part-time W-2 that also had an unreported, and unknown to us, sideline cash business cleaning houses and apartments? Or the Schedule C client who reported just enough income to max-out their Earned Income Tax Credit?
As tax professionals, we have enough to worry about just getting all the necessary information from our clients without the added burden of having to determine if a person qualifies for federal welfare.
The federal government should do whatever it can to encourage the poor to work, to reward them for doing so, and to provide financial assistance to the working poor, but it should not use the tax code to do so."
So, what do you think?