Making Work Pay Credit - What Is It ?
Making Work Pay Credit the Impacts Largest Number of Americans in 2009
The Making Work Pay Credit has 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.
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 can benefit from the credit? The credit is applicable only for taxpayers who have earned income. This means taxpayers must have been gainfully employed and received taxable compensation from wages, salaries and tips. Net earnings from self-employment is considered earned income.
In addition, earned income does not include the following:
- Pension and annuity payments
- Non-taxable compensation
- Parsonage allowance
The following individuals are not entitled to the credit:
- Tax filers without valid Social Security numbers
- Taxpayers who could be claimed as another taxpayer’s dependent
- Nonresident aliens
- Estates and trusts
You may have a potential problem when filing your 2009 tax returns, if you had two jobs during the year and both employers reduced your withholdings. As a result of having improper withholdings from two jobs, you may receive a smaller tax refund or you may have to pay taxes as a result of 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. In this connection, 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. A 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 report to the Internal Revenue Service ? If you receive less than the full amount of the anticipated credit through decreased withholding, then you may be entitled to the full credit on your return. For 2009, taxpayers are required to use Schedule M to report the tax credit. If you use Form 1040EZ instead of schedule M, there is a worksheet on page 2 of the Form 1040EZ that allows you to compute the credit amount.
To learn more about how we can help you prepare your income tax returns, please visit http://www.sl-cpa.net/form1040taxes.php and register in our secured portal for the 2009 tax season and you will lock into our special pre tax season 1040 pricing, a monthly tax and accounting newsletter and over 50 financial web based calculators at no additional charge.
Sandor Lenner,CPA/MBA has over 35 years of accounting experience and is also a Certified QuickBooks ProAdvisor.He works part-time with Susan Missal Lenner, P.A. http://www.sl-cpa.net
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