Making Work Pay Credit Impacted the Most Americans of all the 2009 Recovery Act Changes

By Sandor Lenner,CPA

The Making Work Pay Credit will have a substantial impact on Americans and is targeted towards lower and middle income taxpayers. This credit is one of many tax changes resulting from the American Recovery and Reinvestment Act of 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.

Basically the credit was designed to provide tax relief for working people. Although the credit is technically claimed by taxpayers when they file their 2009 and 2010 tax returns, most taxpayers have already received the benefit of this credit by reduced payroll withholdings (and larger net paychecks) that went into effect during 2009. Unlike last year's stimulus payment taxpayers did not receive a check. Taxpayers received this credit almost immediately, through a reduction in taxpayer's payroll withholdings. Furthermore, this credit is also computed and reflected in the taxpayer's 2009 tax return. The credit is basically $400 for single taxpayers and $800 for married couples filing joint returns. It is calculated as the lesser of 6.2% of the taxpayers earned income or $400 for single taxpayers and $800 for married couples filing a joint return.

Making Work Pay Credit limitations Income taxpayers with higher incomes are not eligible for the credit. This credit is reduced by 2% of a single individual's modified adjusted gross income that exceeds $75,000. For married couples filing jointly, the threshold amount is $150,000. The Making Work Pay tax Credit, is also subject to a reduction by the amount of 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) that you may have received.

Who is able to benefit from the Making Work Pay Credit? The credit only benefits those taxpayers who have earned income. The only requirement is that you were employed and received taxable compensation from wages, salaries and tips. Any net earnings that you receive from self-employment is considered earned income

In addition, earned income does not include (a)Pension and annuity payments (b)Non-taxable compensation and (c)Parsonage allowance

The credit is not available to the following individuals:(a)Taxpayers who do not have valid Social Security numbers (b)Nonresident aliens (c) Taxpayers who could be claimed as another taxpayer's dependent and (d)Estates and trusts.

A potential problem may exist when filing a taxpayer's 2009 tax returns. If you had two jobs during the year and both employers reduced the your withholdings, then you may receive a smaller tax refund or you may have to pay taxes as a result of the reduced withholding during the year. Corporate employers applied the new withholding tables based on the assumption that 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 example of a potential problem, may occur for those taxpayers who had other income besides their W-2 salaries. The other income could put the 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).

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.

This article is not intended to be legal or accounting advice. Tax laws are complex,change constantly and each situtation is unique. The reader is advised to do his or her own due diligence and consult competent professionals in these areas. - 29856

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