More than 15.4 million people, the Making Work Pay tax credit enacted as part of the $787-billion economic stimulus package could turn out to be a Making You Pay Back tax credit. The IRS instructed employers to use the new withholding tables in lieu of the applicable previously published tables and to do so by April 1, 2009. In addition, the IRS instructed that the new tables should be applied to pensions. The tables were designed to advance about $400 to single filers and about $600 to joint filers by the end of Tax Year (TY) 2009. Joint filers3 will then receive the additional $200 credit when they file their TY 2009 tax returns since they are eligible for up to $800. That’s the finding of a government report, it is the signature tax cut that President Obama promised in his campaign and was delivered with much fanfare in February. In order to maximize the credit’s stimulative effect on the economy, withholding changes for taxpayers kicked in within days of Obama signing the legislation and taxpayers started seeing the changes in their paychecks in April. In essence, the credit was “advanced to taxpayers through their wages by a decrease in federal income tax withholding” for the 2009 and 2010 tax years.
The American Recovery and Reinvestment Act of 2009 (Recovery Act) contains many economic stimulus provisions, one of which is the Making Work Pay Credit found in Section 1001 of the Act. The Making Work Pay Credit is a refundable tax credit allowed against the lesser of 6.2 percent of earned income or $400 ($800 in the case of a joint return). The credit will be reduced as taxpayers’ modified Adjusted Gross Income exceeds $75,000 ($150,000 for joint filers) and will be completely phased out as taxpayers’ modified Adjusted Gross Income reaches $95,000 ($190,000 for joint filers). In order to qualify for the Making Work Pay Credit, individuals must have both earned income and a valid Social Security Number. In the case of a joint return, only one valid Social Security Number is required. Earned income is defined in Section 32 of the Internal Revenue Code as “wages, salaries, tips, and other employment compensation…plus the amount of the taxpayer’s net earnings from self-employment…no amount received as a pension or annuity shall be taken into account.”
The credit is to be advanced to taxpayers by their employers through withholding reductions that result in an increase in take home pay, which is intended to help increase spending and stimulate the economy. Advancing the Making Work Pay Credit to taxpayers through reduced income tax withholding creates the potential for some taxpayers to have their taxes underwithheld at the end of the year if the adjustment in their withholding is significantly different than the amount of the Making Work Pay Credit to which they will be entitled.
If taxpayers are advanced more of the Making Work Pay Credit than they are entitled to, they may ultimately owe taxes when they file their TY 2009 and 2010 tax returns such as:
- Dependents who receive wages.
- Single taxpayers with more than one job.
- Joint filers in households where both spouses work or where one or both spouses have more than one job.
- Individuals who file a return with an Individual Taxpayer Identification Number (ITIN).
- Taxpayers who receive pension payments.
- Taxpayers who are employed and receive Social Security or similar benefits referred to in Section 2201 of the Recovery Act.
To determine the extent to which such taxpayers might be negatively affected by the new withholding tables, Because of Obama and his decisions the Making Work Pay Credit may total more than $24.5 million.
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