Making Work Pay is the new American Recovery and Reinvestment Act provision that will result in less federal income tax withholding in your paycheck beginning in April. The added amount in your paycheck may result in tax return changes when you file for the 2009 and 2010 tax years.
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. 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. The IRS issued updated withholding tables (revised Publication 15-T available on IRS.gov) to implement these withholding adjustments. Employers are asked to use the new tables as soon as possible but no later than April 1, 2009.
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 under withheld 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, or
- Married couples whose combined income will place them in a higher tax bracket, or
- Pension recipients with no earned income.
What can you do? It may be beneficial to re-calculate your withholding to ensure you have sufficient withholding to avoid owing any additional taxes for tax years 2009 and 2010. If you usually receive a tax refund when you file your return you probably won’t need to make any changes, but should expect the refund amount to be reduced.
To avoid under withholding, 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, taxpayers can obtain Publication 919, “How Do I Adjust My Tax Withholding” or visit the IRS website and use the “Withholding Calculator” or by calling 1-800-829-1040.
Iowa residents will have additional income included in the calculation for their Iowa State Income Tax because of the reduced withholding. If you typically have to pay additional Iowa income taxes each year the amount you pay will increase next year if all things remain the same on your return.
Contact your tax preparer and ask them to do an estimation of how the new withholding will impact your return. You can send questions to Joyce Lash, Extension Resource Management Field Specialist at lash@iastate.edu or call her at 641-464-3333.
jlash/bmr
7/25/2009