Managing Tough Times: Making Work Pay

In February, the American Recovery and Reinvestment Act (ARRA) of 2009 was signed into law by the President.  "ARRA includes key provisions that impact individual families," say Brenda Schmitt, ISU Extension Family Resource Management Field Specialist.

For tax years 2009 and 2010, the Making Work Pay provision of ARRA will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.  This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000 or $150,000 for married couples filing jointly. For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

Employees do not have to submit a Form W-4, Employee Withholding Certificate, to get the automatic withholding change.

Employers are asked to begin applying these credits as soon as possible but no later than April 1, 2009.These changes may result in an increase in take-home pay. However, the amount of the credit still must be claimed on the taxpayer’s 2009 and 2010 income tax returns (e.g., on the 2009 return filed in 2010). Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their tax return.  Note:  The $250 one time Economic Recovery Payment received by taxpayers from the Social Security Administration, Department of Veterans Affairs or the Railroad Retirement Board or the $250 Special Credit for Certain Retirees will reduce any eligible Making Work Pay Credit.

Caution: Some taxpayers may be underwithheld due to the reduced withholding. This may result in a balance due on the taxpayer’s 2009 tax return.  For example:

• Taxpayers (single or married) who have more than one job, or
• Taxpayers with modified adjusted gross income in excess of the allowable credit
• Married couples whose combined income will place them in a higher tax bracket. 
• Pension recipients with no earned income.

For taxpayers in the situations above it may be beneficial to re-calculate their withholding to ensure they have sufficient withholding to avoid owing any additional taxes for tax years 2009 and 2010. 

To avoid underwithholding, these taxpayers can claim fewer withholding allowances on Form W-4 (line 5 or request an additional amount to be withheld on line 6) or Form W-4P for pensioners. For additional help, visit the IRS website at www.irs.gov and use the “Withholding Calculator” or call 1-800-829-1040.

picture courtesy of theritters at flickr.com