Making Work Pay Credit Impacted the Most Americans of All the 2009 Recovery Act Changes
The Making Work Pay Credit is one of many tax changes resulting from the American Recovery and Reinvestment Act of 2009 that became legislation in early 2009. According to a report from the Tax Inspector General for the Tax Administration dated November 27, 2009, the Making Work Pay Credit is expected to impact 116 million taxpayers and has had a substantial impact on Americans and is targeted towards lower and middle income taxpayers
This tax credit was created to provide tax relief for people that worked during 2009. The credit is claimed when you file your 2009 and 2010 tax return(s). However, most taxpayers may have already received the benefit of this credit by reductions in their payroll tax withholdings (resulting in larger net paychecks) made by your employer during 2009. Through a reduction in the taxpayer’s 2009 payroll withholdings taxpayers received this credit almost immediately. The tax credit is calculated and reflected in the your 2009 tax return. For single taxpayers the credit is $400 and for married couples filing joint returns the credit is $800. The credit is computed as the lesser of 6.2% of each taxpayer’s earned income or $400 for single taxpayers and $800 for married couples filing a joint return.
Limitations on the Making Work Pay Creditt Income taxpayers with higher incomes are not eligible for the credit. For married couples filing jointly, the threshold amount is $150,000. This credit is reduced by 2% of a single individual’s modified adjusted gross income that exceeds $75,000. The credit is also reduced by any Economic Recovery Payment($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran’s benefits) or Special Credit for Certain Government Retirees($250 per eligible federal or state retiree) received during the year.
Who can benefit from the Making Work Pay Credit? The credit is applicable only for taxpayers who have earned income. This means that taxpayers must have been gainfully employed and received taxable compensation from wages, salaries and tips. Net earnings from self-employment is considered earned income.
The following items are excluded from earned income: (a)Pension and annuity payments (b) Non-taxable compensation and (c)Parsonage allowance
The following individuals are not entitled to the credit:(a) Tax filers without valid Social Security numbers (b) Taxpayers who could be claimed as another taxpayer’s dependent nonresident aliens (c) Estates and trusts and (d)Nonresident aliens.
You may have a potential problem when filing your 2009 tax returns, if you had 2 jobs during 2009 and both employers reduced your withholdings,for example, one day and one evening job with different employers. As a result, you may receive a smaller tax refund or you may have to pay taxes resulting from the reduced withholding that was deducted during the year. Since most employers applied the new withholding tables assuming the income from that employer was the only source of the taxpayer’s income. As a result, insufficient withholding may result of up to $400 per employer in excess of one for taxpayers who do not file jointly, or $800 per employer in excess of one for joint filers. Another potential problem, could occur for taxpayers who had other income in addition to their W-2 wages. The other income could put you into the total or partial phase-out category of the credit, and could result in under-withholding of up to $400 ($800 for joint filers). And finally, this is a new tax credit and may be an easy for taxpayers who prepare their own taxes to miss.
How to claim the Making Work Pay Credit ? If you did not receive the full amount of the anticipated credit through reduced withholding, then you very well may be entitled to the full amount of the credit on your 2009 tax return. For 2009, taxpayers must use Schedule M to report their tax credit. If they use Form 1040EZ instead of schedule M, then there is a worksheet on page 2 of the Form 1040EZ that provides in an easy to understand format to compute the credit.
Tax laws are complex,change constantly and each situtation is unique. This article is not intended to provide legal or accounting advice. The reader should perform his or her own due diligence and consult with competent professionals in this area.
Learn more about how to save taxes by getting a copy of my free EBook entitled 12 Tax Income Tax Credits and Incentives that Can Help You Reduce Taxes with Your 2009 Income Tax Return. Get your copy of the free EBook until March 15, 2010 when it goes on sale for $9.99. Sandor Lenner,CPA has provided accounting services for 35 years. He is also a Certified QuickBooks ProAdvisor.