Your Tax Refund and Changes to the EIC

September 08, 2016 : Lynn Ebel

If tax credits were people, the Earned Income Credit (EIC) would be the party starter. This credit is easily the crowd favorite because, for qualifying people it can be worth over $6,000. It is also refundable, so even if you do not have enough tax liability to eat up the credit, the EIC will increase your refund, which you’ll get as a check from the IRS. Clearly this credit is worth the time and effort to see if you qualify. And, only four out of five of the people eligible for the EIC actually claim it, so it’s a hidden gem.

For the upcoming tax year, there’s some new changes for the EIC that we want you to know about. First, you need to know that the requirements to qualify for the EIC. But, there are new rules that could affect you when you file next year. They are as follows:

1. If you claim the EIC, your refund will be held until February 15, 2017.

Even if you qualify for the EIC, get your W-2s early, and pair direct deposit with e-file, the IRS has already announced that refunds due on tax returns claiming the EIC will be held until February 15. The purpose of this new refund delay is to match tax return withholdings with the W-2s the employers send in by January 31st, which is also a new IRS rule. This matching will reduce EIC fraud and the tax gap. If you file after February 15, your refund should be processed within the normal 21-day timeframe.

[Pro tip: Use “Where’s My Refund?” to check to status of your refund.]

If you are accustomed to receiving your return right away and if you qualify for the EIC, check out the H&R Block Emerald Advance®, a year-round line of credit.

2. There’s no retroactivity when you obtain a Social Security Number (SSN) that is valid for employment.

To qualify for the EIC, you must have a valid SSN. Previously, taxpayers who obtained a valid SSN could amend prior year tax returns (if the year was within the timeline for claim for refund and all other qualifications were met). Due to recent tax law changes, to qualify for the EIC, you now need a valid SSN by the due date of the tax return in which you claim the EIC. So, if your SSN is issued after the due date of a particular year’s tax return, you will not be able to retroactively amend and claim this credit. So, if you are waiting on the Social Security Administration to issue your SSN, you should file an extension to meet the timeline.

3. There are changes to tax penalties for those who incorrectly claim the EIC.

The new rules have made improperly claiming the EIC when you do not actually meet all of the rules even less attractive. The EIC is now subject to the penalty for erroneous claiming refunds and credits; in fact, it is often called the “accuracy penalty” or “negligence penalty”. Additionally, the underpayment penalty could apply to the amount of taxes you owed when the erroneous EIC is consequently removed from your return in an audit.

If that is not motivation enough to make sure you meet every EIC requirement, don’t forget that the IRS can bar someone from claiming EIC for 10 years if it finds that person has fraudulently claimed the credit.

Lots of change is happening this year, but it’s all for a good reason: to benefit you, the taxpayer.

For more information on changes to the EIC, head to the IRS website.

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Lynn Ebel

Lynn Ebel

The Tax Institute, H&R Block

Lynn Ebel, JD, LLM, is manager of The Tax Institute's research department. Lynn specializes in real estate tax issues, including property transfers, passive activity losses, and bankruptcy issues.