Making Work Pay Tax Credit: Issues That May Impact You

When the Making Work Pay (MWP) tax credit ($400 for individuals, $800 for married couples filing jointly) went into effect earlier this year, the IRS adjusted its tax withholding tables to account for the new tax credit. This has had the effect of providing most taxpayers with a small increase (roughly $12 a week) in their take-home pay.

However, the new withholding tables may cause problems where an individual's employer has already adjusted their withholding to receive the full MWP credit but the individual is not eligible for the credit or only eligible for a reduced amount. Unless they proactively adjust their withholding, these individuals may end up owing a balance due on their tax return at the end of the year. This specifically applies to those who:

  • work more than one job;
  • work but are claimed as a dependant;
  • are married, and both partners earn income;
  • work and collect certain government pensions;
  • work and collect Social Security, Supplemental Security Income (SSI), Veterans Affairs benefits, and/or Railroad Retirement Board pension; or
  • collect a private pension.

Ultimately, everyone’s situation is unique, but anyone in the above groups should speak with their human resources office, payroll department, or tax advisor to ensure that they are withholding the proper amount. In general, it is a good idea for all taxpayers to be conscious of their tax withholding status. Those who withhold too much delay receipt of money that they have earned, while those who withhold too little may end up owing a balance on tax day.

 

If you work more than one job, you may have had the MWP credit withheld from your paychecks at each of your jobs, even though you, as an individual, are only entitled to claim this tax credit once.

If you work but are claimed as a dependent by someone else, you are not eligible for MWP, but your withholding has been adjusted as though you were eligible for the credit.

If you are married, both you and your partner earn income, and you indicate that you will file your taxes jointly on your withholding forms, then you and your partner may have each had the full, married couple amount of $800 withheld from one or both of your paychecks. This could add up to $1,200 to $1,600 less in withholding for the household, even though married couples are only eligible for a credit of $800 per household.

If you collect certain government pensions, you may be eligible for a refundable $250 tax credit on your 2009 tax filing (by April 15, 2010). If you also earn income, this $250 tax credit is subtracted from your MWP credit. In this case, your withholding has been adjusted as though you were receiving the full $400, when in fact you are only eligible for $150.

If you collect Social Security, SSI, Veterans benefits, or Railroad Retirement Board pension, you have received, or will receive, a check for $250 in the mail. If you also earn income, this $250 is subtracted from your MWP credit on your 2009 tax filing (by April 15, 2010). In this case, your withholding has been adjusted as though you were receiving the full $400, when in fact you are only eligible for $150.

If you collect private pension benefits, you are not eligible for MWP unless you also have earned income. Since your withholding has been adjusted for this tax credit, you may need to readjust if you are not eligible. The IRS has released a new withholding adjustment procedure for private pension plans, which payors are encouraged but not required to use. You should coordinate with your payor to check if the new procedure is being used. If so, then you do not need to make any adjustment.

 

For more information or to download forms and publications, please visit IRS.gov. You can also request a free copy of these forms by calling toll free 1-800-TAX-FORM (1-800-829-3676). If you have concerns about the tax consequences of this benefit, please seek the counsel of tax advisor/attorney.