The Tax Club Report

Remember the $600 check, or more, that were mailed out to taxpayers in 2007?  That was the result of the government trying to stimulate the economy with a one-time shot.  A similar economic stimulus was part of a new 2009 tax law.  But this time, instead of mailing out one check, the government reduced the amount of withholding on paychecks, so the rebate would start sooner and be spread out over two years.

How the Making Work Pay Tax Credit Works

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.  A refundable credit means that if you are eligible, you will receive the credit even though you may have no tax liability.

This tax credit will be calculated at a rate of 6.2% 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.  The 6.2% equals the social security taxes that are withheld from an employee’s paycheck. An additional 1.45% is withheld for Medicare, but that will not change.

For employees who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes.  The employee does not need to take any action.  These changes should result in an increase in take-home pay. The amount of the credit will be computed 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.

Will The Credit Affect Your Tax Bill?

Some people, though, may find that the changes built into the withholding tables result in less tax being withheld than they prefer.  For those individuals, they may find that an expected small refund may turn into a small deficit when they file their taxes. 

This could be the case for Social Security recipients and federal and state retirees because the tax credit will be reduced by the amount of any Economic Recovery Payment, which was $250 paid to eligible recipients of Social Security, Supplemental Security Income, Railroad Retirement or Veteran’s benefits or the $250 Special Credit for Certain Government Retirees.

Other groups of taxpayer may also face problems.  Pensioners do not qualify for the Making Work Pay tax credit, unless they receive earned income. However, because the new withholding tables also apply to pensioners, less tax will be withheld from payments even though the actual tax liability will not change. If desired, pensioners can adjust their withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.

High-earning couples may also find their withholding will now be insufficient because of the phase-out of the credit.   A single tax filer who holds the same job all year should not be affected.

What to Do to Avoid Owing On Your 2009 Tax Return

How can you find out if your withholding will match your taxes? The Internal Revenue Service has an online withholding calculator at www.irs.gov to help figure out whether enough was withheld.  If you find that you might owe taxes, there are several options you can consider.

1. You can make adjustments to your withholding by filing a revised Form W-4, Employee’s Withholding Allowance Certificate, with your employer. 
2. Make a payment to the IRS by Jan. 15 for the amount you think you might be short. 
3. You can wait until you file your 2009 taxes and pay up then. The IRS said taxpayers would be able to get a waiver for any underpayment penalty caused by the tax credit.  Remember, that even if you file an extension, you will still need to pay any tax due by the April 15 deadline.

There are a lot of changes to the tax rules and The Tax Club is committed to educating individuals and small business owners on them. If you would like more information on this topic, please give us a call at (866)840-1829 x5438.

This entry was posted on Monday, November 30th, 2009 at 1:44 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.