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Make Working Pay Tax Credit Hits Paychecks Soon

The Make Working Pay tax credit was included as part of the American Recovery and Reinvestment Act [1]. Beginning in the next few weeks, you’ll begin to see the money in your paycheck.

Make Working Pay Tax Credit

The credit is $400 for working individuals and $800 for married filing joint [2]. The refundable credit [3] is available in 2009 and 2010. (In 2011, it will be replaced by the Payroll Tax Credit [4]). The maximum credit is 6.2% of earned income; it phases out at $75,000 for individuals and $150,000 for married couples filing jointly.

If you don’t meet the making work pay tax credit eligibility [5], you may have to repay the tax credit.

How To Get Your Money

The withholding on your paycheck will be lowered resulting in more take home pay. You do not need to submit a new W-4 form [6], your employer will automatically adjust your withholding. Employers need to begin using the updated withholding tables no later than April 1, 2009.

If you are curious, you can calculate the new amount you’ll have withheld based on the new withholding tables [7]. Use the table that corresponds to the filing status [2] and number of exemptions your employer has on file from your last W-4.

If you don’t make enough to pay income tax or your employer does not withhold taxes, you can claim the credit on your 2009 tax return.

For Self Employed

Self employed workers can reduce your estimated tax payments [8] if you want to keep the money in your pocket instead of waiting to claim your tax credit when you file your return.

You can see Publication 15-T [9] for more information from the IRS on the Make Working Pay Tax Credit.

Action Plan

Because the $400 will be spread out over 9 months, it could get easily lost in your day-to-day finances. If you are paid every other week, you will probably see about $20 extra per paycheck.

Make a plan of how you want to spend your tax credit, without just absorbing the money into your monthly cash flow. To keep track, separate the extra money each time you get paid and allocate it to your goals. Once you receive your entire $400, you’ll have something to show for it instead of wondering where it went!