Making Work Pay Tax Credit
by Barry L Weller, EA
For 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns. This tax credit will be calculated at a rate of 6.2% of earned income and will phase out for taxpayers with adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly. Individuals who do not provide a social security number on their returns are ineligible for the credit.
For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. It is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough withholding is held to cover the tax for his or her combined income.
Earnings from self-employment also qualify to the extent they are taken into account in computing taxable income. The employer’s share of FICA remains unchanged.
The new law also provides for a one-time payment of $250 for 2009 only to individuals on fixed incomes (primarily social security recipients). This payment will reduce any Making Work Pay Credit to which the individual would otherwise be entitled. The logistics for distributing the $250 checks have not yet been announced. The assumption, however, is that the IRS will follow a distribution plan similar to the 2008 stimulus payments.
Barry L Weller, EA is the president of Barry Weller & Associates with offices at 216 E Philadelphia Ave, Boyertown, PA 19512 Phone (610) 367-8280 He is an enrolled agent, licensed to represent taxpayers before the IRS.