18 July 2015

The Earned Income Tax Credit (EIC) is an anti-poverty measure in the tax code that provides a refundable tax credit to low income working Americans. While it has its roots in the 1970s, I am old enough to remember that EIC was largely expanded in the tax reform measures of 1986. President Reagan called the EIC , "the best antipoverty, the best pro-family, the best job creation measure to come out of Congress."

Like any law the EIC is imperfect, of course, and I find some of the unintended consequences of the EIC to be quite troubling. First among them is that some tax preparation firms take advantage of the EIC to line their own pockets. In a nutshell, EIC made it profitable to serve low income clients. Far too many people with simple income tax returns became willing to swallow a $400 tax preparation fee when informed they can get a $5,000 refund. The prospect of having some extra money is exciting, and the hefty fee gets lost in the excitement.

After the EIC was enacted tax prep firms started springing up in low income neighborhoods all over America. When I was in the Navy it was well-known that near any Navy base you could find plenty of bars, pawn shops, and payday lenders. Thanks to the EIC you can add tax preparation firms to that list. There are at least 10 within a mile of the main gate for JEB Little Creek-Fort Story.

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It's not that I think low income people shouldn't have access to professional tax preparation. I just object to the outrageous fees most places charge to do an EIC return - a fee they can only charge because the return will generate a large refund, giving the low income taxpayer a means to pay for the tax preparation. The tax credit is supposed to help Americans out of poverty, not enrich the corporate tax mills.

A second problem with EIC is that it's paid as a lump sum. I am a professional financial planner, but if you handed me 4 or 5 months' worth of salary all at once I'd be hard pressed to put it to use in an entirely efficient manner. Lump sums are just flat hard to deal with for anyone, let alone someone who may not have the financial knowledge to use it effectively. If the person receiving it doesn't have good money management skills the EIC might be good money thrown after bad. We want EIC to help lift people permanently out of poverty, not just give them a brief respite from it.

And finally, there's fraud. Billions of dollars in fraud. There are some taxpayers (and tax preparers) who are willing to lie to get EIC. It's frustrating. The IRS has put additional measures in place to try to stop it, and it still happens. To a degree it is to be expected, but we should never accept it. Nor do I think we should throw the baby out with the bath water. Some people abusing the rights and privileges of a prosperous society shouldn't be the reason we start withholding rights and privileges from everyone else. 

I am a firm believer that every taxpayer should claim every credit and deduction they are entitled to. If you meet the requirements for EIC, I'll help you claim it. I don't try to enrich myself on EIC returns at PIM Tax Services. I charge a bit extra because there is an additional "due diligence" form the IRS requires me to complete. The form is a fraud prevention measure, and I take it seriously. In addition to being a tax preparer I am also a financial planner, so I can offer clients some ideas on how to make the most efficient use of large tax refunds. There are some problems with the EIC, but it's nothing we can't handle face-to-face in my office at tax time. 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, and the National Association of Personal Financial Advisors. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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