“Making Work Pay”

Filed in Employment, Tax Credits, Tax Law by on June 24, 2009

The “Making Work Pay” credit legislation was included in the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5).  The legislation provided eligible individuals with a refundable income tax credit (the “Making Work Pay” credit) for the 2009 and 2010 tax years on their personal income tax returns.  The amount of the credit is the lessor of: (a) 6.2% of the taxpayer’s earned income, or (b) $400 ($800 for joint filers).  The credit is phased out for certain high income taxpayers.  Pension income recipients are not eligible for the credit.

Employees receive the credit incrementally through a reduction in the amount withheld from their paychecks.  However, the withholding tax reduction may be significantly different than the amount of the credit that they will be able to claim on their personal income tax returns.  The IRS is advising the following employees that their withholding tax deductions may not be sufficient to cover their tax liability when they file their personal income tax returns next April:

  • an employee with multiple jobs;
  • a married couple where both the husband and wife work;
  • a retiree who receives a pension and does not have any wage income;
  • an employee who does not have a valid Social Security number;
  • an employee who can be claimed as a dependent on someone else’s return; and
  • an employee who receives Social Security, SSI, railroad retirement, or veteran’s disability payments.

The IRS recommends that the above employees perform the following three procedures.  First, they should gather their pay stubs and a copy of their most recent personal income tax return.  Second, they should either review IRS Publication 919, How Do I Adjust My Tax Withholding?, or adjust their withholding using the withholding calculator on the IRS website.  Third, employees should give their employer a revised Form W-4.  Pensioners should give the payer of the pension income a revised Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Source: Federal Tax Updates on RIA Checkpoint Newsstand 6/24/09

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