What is the Making Work Pay Tax Credit?

The Making Work Pay credit is part of the American Recovery and Reinvestment Act signed into law in 2009. This credit is designed to give a little bit more money back to the working population. Unfortunately in some cases taxpayers may see less of a refund due to the way this credit works.

During the years 2009 and 2010 this credit is calculated at a rate of 6.2 percent of a taxpayers earned income. This credit phases out at an income of $75,000 and $150,000 for taxpayers that are married and filing jointly. This credit provides a refundable credit of up to $400 for single, qualifying widower, MFS and head of household filers. For those filing under MFJ the credit provides up to $800.

There are two catches to watch out for on the Making Work Pay credit. The requirement of the credit is that the taxpayer must have earned income. Unemployment compensation, interest payments and retirement income do not qualify for this credit. Self-employment income does qualify.

For those receiving Social Security income, Railroad Retirement or Veteran's benefits there is an Economic Recovery Payment available for up to $250. There is also a Special Credit for Certain Government Retirees for up to $250 for those that qualify.

The second problem area for many taxpayers is that they may have already been receiving the credit by a reduction of federal taxes on their regular payroll checks. Many employers calculated the credit during the tax year and withheld less in federal taxes. If the taxpayer was not aware of this they may expect a credit when they file their taxes that they have actually already received.

This situation poses a greater problem than just receiving less of a refund than expected. Some taxpayers may find that they actually owe more in taxes due to receiving the credit during the year. Taxpayers that have more than one job may be receiving the credit from all of their employers. Married couples with two incomes could possibly end up receiving more credit than the Act allows. Many taxpayers that receive certain 1099 income can also end up owing some of the credit back. Many payers reduce the federal tax withholdings when paying 1099 income. Unfortunately the 1099 income does not qualify for the Making Work Pay credit.

For those caught in the 1099 situation they may be able to make up for a portion of the credit received with the Economic Recovery Credit. Other taxpayers may wish to check with their payroll offices and have their withholding tax rate adjusted if their particular situation will cause an excess of credit during the year and more taxes due at the end.

References:

http://www.irs.gov/newsroom/article/0,,id=204447,00.html