When the American Rescue Plan Act of 2021 sent the monthly expanded Child Tax Credit (CTC) to families, it marked the first time many Americans had ever received advance payment of a tax credit. This reintroduced a conversation about whether the government should pay out tax credits in advance. The Urban Institute surveyed taxpayers who received the advance CTC in 2021 and found that people were generally more likely to prefer the monthly payment the lower their income was. Nearly 40 percent of low-income, working-age adults experience income volatility in at least six months of the year, and advance payments can smooth those spikes and dips in income. While the conversation around advancing payments has focused on the CTC, options to advance the Earned Income Tax Credit (EITC) also warrant further discussion.
Liberal welfare regimes like Canada, New Zealand, Australia, and Ireland, all successfully offer in-work credits with advance payment options. The approaches of Canada and New Zealand, in particular, are useful models for advancing payments. Both countries utilize an online portal where beneficiaries can update the IRS about changes in their life circumstances. The countries also implement systems that protect recipients in the case of credit overpayment. U.S. policymakers seeking to advance payment of the EITC should learn from these countries and adopt similar measures.
An international perspective on in-work tax credits
President Gerald R. Ford signed the EITC into U.S. law as a part of the Tax Reduction Act of 1975. The EITC is an in-work credit, which means that it aims to provide financial assistance to working low-income people and families. The credit phases in as earnings increase until it reaches a maximum benefit. Then it plateaus briefly before phasing out. Income thresholds vary by marital status and number of children, while benefit amounts depend solely on the number of children.
From 1979, workers with a qualifying child could opt for advance EITC payments, but uptake was low (3 percent between 2002-2004) due to lack of awareness, preference for lump-sum payments, or concern about owing the IRS. President Obama ended the advance EITC in 2010. In contrast, Canada and New Zealand have successfully advanced payments for in-work credits similar to the EITC.
The Canada Workers Benefit (CWB) is determined by marital status, net income, and eligible dependents. Available to both childless individuals and parents, the CWB uses the same phase-in, plateau, and phase-out structure as the EITC. Canada taxes at the individual level, but the government provides the CWB at the household level. The maximum CWB benefits are CAD 1,518 for childless individuals and CAD 2,616 for workers with children. The credit phases out at annual adjusted net incomes of CAD 35,095 and CAD 45,934, respectively. A full-time minimum wage worker qualifies for the credit (annual salary of CAD 34,600) but the average Canadian worker does not (CAD 78,182). The Canada Revenue Agency advances 50 percent of the CWB–distributing payments quarterly–and disburses the second half at tax time.
New Zealand offers supplemental income through the in-work tax credit (IWTC), part of the Working for Families program. This benefit is available only to workers with children, unlike the CWB and EITC. Taxes are calculated at the individual level, but credits are designated per household. Eligible workers automatically receive the maximum benefit of NZ$5,044 per year. The benefit remains the same for families with up to three children and increases by NZ$780 per year for each additional child. For a single parent with one child, the credit phases out completely at an income of NZ$69,501. A minimum wage worker is comfortably within the benefit range (annual salary of NZ$46,300) but the average New Zealand worker is not (NZ$84,453).
New Zealand families are given the choice between weekly, fortnightly (every two weeks), or annual lump-sum payments of the IWTC. Within the broader Working for Families program, 66.5 percent of recipients opt for weekly or fortnightly payments. The advance credits are paid directly to recipients by Inland Revenue, New Zealand’s revenue service.
Lessons from our peers
Both Canada and New Zealand have implemented efficient systems for advancing in-work tax credits, providing a few key takeaways. Both governments have efficient online portals where beneficiaries can report changes to their income and family circumstances throughout the year. Each country also has a plan in place in the case of overpayment, known as a safe harbor provision. Canada only pays out half of its credit in advance, while New Zealand provides beneficiaries with options for debt repayment. The approaches of these two countries, which are compared to the U.S. approach in Table 1, could provide a blueprint for U.S. policymakers looking to advance payment of the EITC.
Table 1: How do in-work credits differ between countries?
Efficient Online Portal: Canada and New Zealand both provide beneficiaries with online portals where they can report changes in their circumstances. In-work credits are based on factors like income and family status, so the revenue services must have up-to-date information about these factors. Through a CRA Account, Canadians can update their details, apply for benefits, and find other information. New Zealand’s MyIR page has similar features, as well as benefit calculators that allow citizens to find the programs they qualify for. In both countries, taxpayers can report changes online, by phone, or by mail.
The IRS does not have any sort of streamlined process or online portal where beneficiaries can easily report changes to their circumstances. With the advance EITC, taxpayers who wanted to report changes in their circumstances would have to provide their employer with a printed-out form with their updates.
Safe Harbor Provision: In some circumstances, workers might file their taxes and find themselves with a total benefit out of sync with what they had received earlier. In this case, they would have to reconcile that difference with the revenue agency. Governments can put several systems in place to protect taxpayers when this occurs. Canada and New Zealand take two distinct approaches.
Since the Canadian system only pays out 50 percent of the credit in advance, overpayment just means a lower second payment. This 50/50 structure allows for more flexibility and keeps families from having to pay out of pocket. New Zealand gives taxpayers the option to reconcile any overpayment immediately, in installments, or through a reduction of future benefit payments. The overpayment rate for the broader Working for Families program was about 27 percent in 2023. The revenue service may write off some or all of a family’s debt based on their financial situation.
The United States had some effective safe harbor provisions when it provided the advance EITC. From 1993 on, only 60 percent of the credit was available in advance–and even before then, overpayment was low. About 7 percent of eligible individuals who received advance payments in 1989 had to make a repayment when they filed a tax return. Despite this, many EITC beneficiaries still feared overpayment, resulting in low take-up rates.
Recommendations for U.S. policymakers
If American lawmakers are interested in re-establishing an advance EITC, they should look to other countries to learn how to effectively do so. The IRS should take steps to develop an effective online portal, prevent overpayment, and implement safe harbor provisions.
The IRS should create a way for beneficiaries to update their circumstances, paired with regular email reminders linking to the service. It already has an online page where people can make payments, access tax records, and view other information. The portal should also allow updates on income, marital status, child custody, and other relevant changes.
Given the success of the ARPA CTC, the United States could be well positioned to prevent overpayment of an advance EITC. Between July and November 2021, the IRS correctly sent roughly 98 percent of the ARPA-related advance CTC payments. Although the CTC and EITC structures differ, this demonstrates the IRS’s capability to manage advance payments effectively. Quarterly credit disbursement would likely further prevent overpayment because beneficiaries have more time to report changes in circumstances between advance payments.
However, to address inevitable overpayments, the IRS should implement safe harbors. Options include repayment plans or advancing only part of the credit. Policymakers could implement lessons from an existing IRS program which has an advance payment option: the premium tax credit. This credit helps cover the costs of health insurance premiums, and the IRS sets caps on possible debt repayment based on household income. While this option may incur higher costs due to incomplete debt reconciliation, it would protect beneficiaries and encourage uptake. Any of the three options discussed above could help increase the take-up of an advance EITC.
Other liberal welfare regimes have demonstrated the feasibility of advancing in-work tax credits. Advance payments improve economic security for people in low-paid and unpredictable jobs, reducing the need for borrowing and advancing equity. If the U.S. considers re-establishing an advance EITC, policymakers should draw insights from these international models to protect beneficiaries and ensure effective implementation.