The American Reinvestment and Recovery Act May Hurt Your Wallet Next IRS Tax Season

The American Reinvestment & Recovery Act, nicknamed "Making Work Pay" was signed into law by President Barack Obama in February. This Act, for the majority of taxpayers, provides a tax credit delivered weekly in your paycheck. By April, all employers were required to be complying with the new tax withholding tables which allowed for the tax credit. While President George W.Bush authorized a lump sum stimulus payment, President Barack Obama opted to deliver extra cash into families weekly paychecks a little at a time: about $8 a week to the individual and called it the Making Work Pay Tax Credit. While a weekly payment is designed to encourage spending, the lump sum stimulus was ideal for those trying to build up a savings account, or cushion, for today's economic environment.

Sounds Good?

Who doesn't like the idea of "Making Work Pay". However, work isn't really paying your taxes for you. Instead, work places were given new income tax withholding tables -- the formulas used to calculate how much taxes are taken out of each paycheck for the IRS. While you are getting more money in your check, you are actually paying less to the IRS. Will Making Work Pay mean in the end, you'll have to pay because work didn't?

According to the government website, www.recovery.gov, "the Making Work Pay tax credit provides a refundable tax credit of 6.2 percent of earned income up to $400 for working individuals and $800 for married tax payers"

So while you won't have to pay that $8 a week back, there's a problem with the new income tax withholding tables.

IRS Warning: The Catch

While an $8 a week tax credit, or stimulus payment, doesn't sound like much, it could still buy 2 gallons of milk. However, even the IRS has issued warnings. The new withholding tables could have directed your employer to be giving you more money than the tax credit amount. In other words, your stimulus payment may not be as great as the sudden jump in pay. This is particularly true of those working two jobs, married couples, dependents and even those receiving pension payments. This means that lump sum you may have come to expect every year in the form of a tax refund, may instead by a lump sum bill called taxes due!

Overcoming the Catch

For those who feel they may be getting more than the approximate tax credit of $8 added to their pay, it's easy to fix. You can fill out form W-4 for your employer and direct them to take more. If you're not sure if you should have more taken out of your check, the IRS has set up a calculator on their website, www.irs.gov/individuals/article/0,,id=96196,00.html. Be sure to have your most recent pay stubs on hand.

Why A Weekly Tax Credit

Why is the Making Work Pay Tax Credit distributed in your paycheck rather than the previous lump sum stimulus payment? The philosophy behind the weekly tax credit is simple and sound. Lump sum tax credits are more easily saved, defeating the purposed of "stimulating" the economy. When a tax credit is doled out a little at a time, most of us aren't capable of putting that little $8 tax credit in a bank account. So we spend it. $8 a week times billions of tax payers adds up to a lot more money being used to purchase.

How To Save That Tax Credit

Fortunately, you can still save that tax credit. If you're like most Americans, you find it difficult in this economy to put an $8 tax credit in a savings account, then fill out a new W-4 form and have that extra $8 paid right back to the IRS. You'll receive your savings when you file your taxes - a true tax credit in lump sum stimulus payment form. While you won't earn interest on it, at least you won't be spending it. And truth is, it's money you didn't have before so you won't miss it.

www.recovery.gov/?q=content/making-work-pay