Making Work Pay Credit

 

The American Recovery and Reinvestment Act of 2009 includes the Making Work Pay credit. The Making Work Pay credit allows a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual’s earned income or $400 ($800 for married couples filing jointly). The credit applies retroactively to the start of 2009 and will be repeated again in 2010. For most taxpayers, they will start to see an increase in their paycheck starting no later than April 1, 2009.

The credit applies in full for individuals whose modified adjusted gross income (MAGI) does not exceed $75,000 or $150,000 in the case of married couples filing jointly. The credit is phased out at a two percent rate above that limit.

Only individuals with earned income qualify for the Making Work Pay credit, which effectively offset an individual’s share of FICA payroll taxes for the first $6,452 in earnings ($12,904 for couples).

The employer’s share of FICA (6.2 percent), would remain unchanged. Qualified taxpayers would take this credit through a reduction in wage withholding or in a lump sum when filing their returns for the tax year. Earnings from self-employment also qualify to the extent they are taken into account in computing taxable income. Individuals who do not provide a Social Security number on their returns, however, are ineligible.

Here are some examples of what it means to you. For the examples, it will be assumed that the employer starts applying the new withholding rates to the first paycheck after April 1 and that you have already received 6 paychecks in 2009.

For a single taxpayer, making $40,000 and being paid every two weeks and claiming 2 exemptions, this will mean about a $17 increase in each paycheck. This means that the withholding for the year will be $340 less. When that taxpayer files their 2009 return, since they have not received the full $400 credit, they will receive an additional $60 credit on their tax return.

For married taxpayer, one wager earner making $40,000 and being paid every two weeks and claiming 2 exemptions, this will mean about a $31 increase in each paycheck. This means that the withholding for the year will be $620 less. When that taxpayer files their 2009 return, since they have not received the full $800 credit, they will receive an additional $180 credit on their tax return.

For married taxpayer, both spouses making $40,000 and being paid every two weeks and claiming 2 exemptions, this will mean about a $31 increase in each taxpayers paycheck. This means that the withholding for the year will be $1,240 less. When that taxpayer files their 2009 return, since they will received the full credit, and their withholding may not be enough to cover their tax liability.

So, while the Making Work Pay credit will put extra money in your pocket today, be sure to look at the whole picture. Withholding from your paycheck that in prior years covered other income, will be less in 2009, so you need to carefully look at what your tax liability will be to ensure you do not end up having to pay when in the past you have received a refund, especially in two wage earner households.