Running into making work pay tax credit problems? As you probably know, early this year congress enacted the Making Work Pay Credit [1] as part of the stimulus package. The Making Work Pay Credit is valid in 2009 and 2010 and is worth 6.2% of earned income (up to $400) for each qualified individual. Companies were required to recognize the credit by reducing withholding, thus adding a small amount to paychecks, beginning last April. The making work pay tax credit eligibility also includes self-employed individuals.
The mandate to adjust withholding applied to ALL workers regardless of making work pay tax credit eligibility [2]. Unfortunately, that means those workers who were NOT eligible for the credit will have to pay it back at tax time. The result will be a reduction of tax refund [3], and those who would not receive a refund will owe the IRS money.
Who has to Pay Back the Making Work Pay Tax Credit?
The following people may not qualify for the Making Work Pay credit and have to pay it back at tax time:
- Pensioners: Pension recipients pay taxes using the same withholding tables as workers, but are not eligible for the credit since pension income is not earned income. If your withholding was not adjusted, you will owe back the amount of the credit
- Social Security Recipients: Social Security Recipients (and federal retirees outside the Social Security System) received a $250 check. If you also work part or full time, any Making Work Pay Credit amount received must be reduced by the $250 check.
- Dependents: Dependents are not eligible for the Credit. If you received it in a paycheck but are still claimed by your parents or other taxpayer, you will have to pay back any amount received.
- Those working two jobs: Each individual is only eligible for one credit, but those working two or more jobs saw it added to both paychecks. You will have to pay back any amount received over $400.
- Those outside the income limits: Those who exceed $75,000 ($150,000 for Married Filing Jointly) will have to pay back 2% of the salary amount exceeding the limit. Those who exceed $90,000 ($190,000 for MFJ) will have to pay back the entire credit amount received.
How to Pay Back the Making Work Pay Tax Credit
The Making Work Pay Credit is documented on the new IRS Schedule M [4]. Reporting what you have received will help determine whether you owe money back. If you file your taxes with an accountant, he or she should be aware of the potential issues.
Nonetheless, if you believe you received the credit even though you were not eligible, be sure to highlight the reasons why so that your accountant can file accordingly. TurboTax [5] should ask you whether you received the $250 credit for retirees and recognize whether your withholding reflected the $400 for workers.
If your lack of credit eligibility leads to you owing taxes, you should be exempt from an underpayment penalty. For more information, see this notice from the IRS.
Going Forward
In 2010, the Making Work Pay Credit will continue to be given in the form of adjusted withholding. If you had to pay it back this year or believe that a personal status change will disqualify you from receiving the credit in 2010, you may want to “unadjust†your withholding to negate the effects of the credit.
In 2011, the 2011 Payroll Tax Cut [6] will replace the Making Work Pay Tax Credit.
You can use the IRS withholding calculator [7] to determine an appropriate withholding amount and then revise your W-4 form [8]. This will prevent you from facing this problem come this time next year!