Making Work Pay Credit

Part of the American Recovery and Reinvestment Act of 2009 is a "Making Work Pay" credit.

This credit is up to $400 for single filers and up to $800 for married couples each year for two years. 

Here's how the credit works – In April, 2009 the IRS released new tax-withholding tables for employers to use when figuring workers’ paychecks. 

The credit will be administered through cuts in withholding at the employer level.  The credit will phase out for individual taxpayers with adjusted gross income of $75,000 (up to $95,000) or $150,000 for married couples filing jointly (up to $195,000).  If you are a higher income taxpayer, you will see little or no change in your pay.

For most taxpayers this "Making Work Pay” credit will essentially amount to some extra pocket change - approximately $11 per week for a single employee, and approximately $22 per week if you are married.

There are, however, potential problems for some taxpayers.  It is possible, based on your withholding status, that you could have an “under withholding” situation at the end of the year.  Among those taxpayers affected by this are college students and others who may be claimed as a dependent on someone else’s return.  If you are claimed as a dependent on someone’s return, you do not qualify for the Making Work Pay credit.  This means that those taxpayers will have to return any credit paid out to them or experience a lower refund.

Additionally, married taxpayers who both work should carefully review withholdings.  It is conceivable that if you file a joint return with your spouse, and you both work it is highly likely both employers, without knowledge of your tax situation, will adjust withholding such that both you and your spouse receive up to $800, for a total of $1,600.  However, when you file your return, the actual credit allowed is $800, causing a repayment of up to $800 with your tax return.

The bottom line is that if any special circumstances apply to you, be aware of how much is being withheld from your check.  If you know that your combined incomes are over the phase out limits, or that your income may run up the bracket as a married taxpayer or due to holding more than one job, you should make accommodations now (by having additional withholdings taken from your pay) so that you don’t get caught by surprise next tax filing season. 

The IRS has several additional sources to help you better understand this tax credit, and whether or not you should change your federal withholdings. 

Click on the links below for more information:

• IRS Audio podcast
• IRS YouTube video
• IRS Tax Tip 2009-07
• IRS W-4 withholding calculator
• IRS Publication 4766
• IRS Website