Making Work Pay Credit

IRS posts Q&As on the Making Work Pay Credit

Making Work Pay Credit: Questions and Answers, IRS Web Site

IRS has posted a number of questions and answers (Q&As) on the Making Work Pay Credit (MWPC) on its web site. They are grouped into four categories: general issues, Form W-4, new withholding tables, and economic recovery payments. The most widely applicable information from each of the four categories is summarized below.

Background The refundable MWPC is available to eligible individuals for tax years beginning in 2009 and 2010. The MWPC is the lesser of (1) 6.2% of the taxpayer’s earned income (with some modifications) or (2) $400 ($800 for a joint return). (Code Sec. 36A(a)) Generally, an eligible individual is any individual other than: (1) a nonresident alien; (2) an individual with respect to whom another may claim a dependency deduction for a tax year beginning in a calendar year in which the eligible individual’s tax year begins; and (3) an estate or trust. (Code Sec. 36A(d)(1)(A))

The credit is phased out at a rate of 2% of the taxpayer’s modified adjusted gross income ()–i.e., AGI increased by any foreign income or income from Puerto Rico or American Samoa excluded under Code Sec. 911 , Code Sec. 931 or Code Sec. 933 –above $75,000 ($150,000 for a joint return). (Code Sec. 36A(b))

Observation: Thus, the credit phases out completely at modified AGI of $95,000 ($190,000 on a joint return).

The credit is reduced by any payment received by the taxpayer under Recovery Act Sec. 2201 or any credit allowed to the taxpayer under Recovery Act Sec. 2202 (these are recovery payments under the Veterans Administration, Railroad Retirement Board, and the Social Security Administration and a credit for certain government workers). (Code Sec. 36A(c))

In early March, IRS issued IRS Publication 15-T (New Wage Withholding and Advanced Earned Income Credit Payment Tables (for wages paid through December 2009) and asked that employers begin using these tables in lieu of the applicable previously published tables as soon as possible, but no later than Apr. 1, 2009.

General Issues MWPC explained. In tax years 2009 and 2010, the Making Work Pay provision will provide a refundable tax credit of up to $400 for individuals ($800 for married filing jointly).

How credit is obtained. For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes made in early spring 2009. These changes may result in increased take-home pay. The amount of the credit will be reported on the 2009 income tax return. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return filed in 2010.

Self-employed individuals. Such individuals can claim the credit on their 2009 return filed in 2010. They should evaluate their expected income tax liability and determine whether they want to make any adjustments in their estimated tax payments.

Private pensioners. Such individuals are not eligible for the MWPC unless they have earned income. However, because the new withholding tables reduce the taxes withheld from all taxpayers, pension recipients may not have enough tax withheld from their pension benefits to cover their tax liability on those payments. They should evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding on Form W-4P.

Social security number. IRS says eligibility for the MWPC is conditioned upon providing a valid SSN. An individual is not eligible if he does not include his social security number on the return.

Observation: IRS does not point out that, for joint filers, this requirement is met if the social security number of one of the spouses is included on the return. (Code Sec. 36A(d)(1)(B))

Credit not fully received. Taxpayers receiving less than the full amount of the anticipated credit through reduced withholding will still be entitled to the full credit on their return.

Form W-4, Employee’s Withholding Allowance Certificate Changing one’s Form W-4. Generally, for people who receive a paycheck, the credit will typically be handled by their employers through automated withholding changes. A Form W-4 will not need to be submitted for the automatic withholding change. An employee with multiple jobs or married couples whose combined income place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough withholding is held to cover the tax for his/her combined income. Publication 919, How Do I Adjust My Tax Withholding?, provides additional guidance for tax withholding.

Observation: calculations show that the withholding tables produce anomalous results in various situations.

Nonresident aliens and dependents. Because nonresident aliens and those who can be claimed as dependents on someone else’s income tax return are not eligible for the MWPC, the new withholding tables may cause them to be underwithheld. These taxpayers need to evaluate their expected tax liability for the year and determine if they need to either make appropriate estimated tax payments or adjust their withholding on Form W-4. However, Publication 15-T, New Wage Withholding and Advanced Earned Income Credit Payment Tables (for wages paid through December 2009), does include additional amounts to be added to the pay of nonresident aliens to figure their income tax withholding.

No employer determinations. Employers are not required to make determinations with regard to an employee’s eligibility for the Making Work Pay credit. Employers just need to withhold consistently with the employee’s filed W-4 and the newly modified withholding tables.

New Withholding Tables Nonresident aliens. The previous percentage method tables do not continue to be used for nonresident aliens. The new tables should be used and they have new higher amounts to be added to the pay of nonresident aliens to figure their income tax withholding.

Pension income. The new withholding tables are applicable to certain pension payments unless the recipient has elected no withholding. However, pension payments are not considered earned income for purposes of the credit. Consequently, a pension recipient with no earned income would not be eligible for the credit and may not have enough withheld from their pension benefits to cover their tax liability on those payments. It is recommended that pension recipients evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding on Form W-4P.

Economic Recovery Payments Economic recovery payments explained. The economic recovery payment is a one-time payment of $250 that will be made in 2009 to retirees, disabled individuals and Supplemental Security Income (SSI) recipients receiving benefits from the Social Security Administration, disabled veterans receiving benefits from the Department of Veterans Affairs and those receiving benefits from the Railroad Retirement Board.

How payments are made. Unlike payments made in 2008 under the economic stimulus payment program, the economic recovery payment will not require a special tax return and will not come from IRS. Individuals who may qualify for this year’s economic recovery payment should contact their respective agency for more information. The Social Security Administration’s Web site has a special section on the economic recovery payment.

Effect on withholding. Individuals receiving economic recovery payments may want to evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding.

Special credit for certain government retirees. The “Special Credit for Certain Government Retirees,” available on the 2009 tax return, reduces the Making Work Pay credit by the amount of the provision’s credit. Therefore, withholding under the new tables should not adversely impact individuals eligible for this credit.

Observation: Apparently, what IRS means is that, since this is a credit and not a payment, too much will not be withheld because the tables provide reduced withholding for the MWPC but not for the special credit and together they cannot exceed $400. For example, assume a worker with $10,000 of wages qualifies for the MWPC and the special credit, and his withholding is reduced by $400. This will be the correct result because the worker will be entitled to a $250 special credit and a $150 MWPC ($400 reduced by $250).

Making Work Pay Q&As can be viewed on the IRS website at https://www.irs.gov/newsroom/article/0,,id=205922,00.html

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