Earned Income Credit
Taxpayers eligible for the tax credit called Earned Income Credit, or EIC, receive a reduction in their tax liability. In some situations, a taxpayer can receive a refund even if she didn't owe any income tax. The tax credit is a tool to help lower income taxpayers, primarily those with qualifying children.
The purpose of form W-5 is to enable the qualifying taxpayer to receive a portion of the tax credit in advance with his pay. The amount a taxpayer might receive in advance depends primarily on his pay scale. There are caps on how much an employer can advance the taxpayer during the year. For example, during 2010 the maximum amount an employer can advance the employee for an EIC is $1,830. The advance maximum is not necessarily the maximum amount the taxpayer receives in EIC. The taxpayer may receive an additional credit amount after filing his income taxes for the year.
While the taxpayer normally files his tax return forms with the Internal Revenue Service, the completed W-5 goes to the taxpayer's employer. The employer funds the advance by including the money in the employee's paycheck. The taxpayer reports the advance payments he receives when completing the 1040 or 1040A for the Internal Revenue service. To qualify for an advance the following year, the employee files a new W-5 with the employer. If spouses are each applying for an advance, they must each complete their own separate forms. One taxpayer cannot have more than one active W-5 during a tax year.
To qualify for an advance EIC payment the taxpayer must have a valid Social Security number, a qualifying child and an adjusted gross income that does not exceed the limit specified for the tax year for which you apply. For example, for 2010, your adjusted gross income for that year must be less than $35,535, or $40,545 if filing separately. Some taxpayers might qualify for an EIC when filing for their taxes yet won't qualify for an advance EIC.