Amount of the CreditThe credit is worth 6.2% of an individual's earned income, with a maximum credit of $400 per person. Married couples who file a joint tax return thus have a maximum credit of $800.
Other Tax Credits Can Reduce the Dollar AmountThe dollar amount of the Making Work Pay credit is reduced by any economic recovery payments. This is a one-time-only tax credit of $250 for Social Security recipients, retired railroad workers, and disabled veterans. Thus a Social Security recipient who is also working would be eligible for a Making Work Pay credit of only $150 (that's $400 minus the $250 economic recovery payment).
The dollar amount of the credit is also reduced any credit received by government retirees who are eligible for a new, one-time-only tax credit of $250. This credit is similar to the economic recovery payment.
Credit Phased-Out Based on IncomeThe Making Work Pay credit starts to be reduced for individual filers making $75,000 in modified adjusted gross income, or $150,000 for joint filers. The credit is reduced by 2% of the amount of income in excess of the $75,000 (or $150,000) threshold. The credit is completely phased out for individuals making $95,000 or more, or $190,000 for joint filers.
Earned Income Required for the CreditIndividuals with earned income are eligible for the Making Work Pay credit. Earned income for the Making Work Pay credit means income from wages and self-employment.
There's two modifications here, though. Any net self-employment income that is not taken into account for taxable income is also not taken into account for the Making Work Pay credit. Also, any combat pay which is otherwise excluded from income is taken into account for the purpose of calculating the Making Work Pay credit.
Who's Eligible, and Who's Not EligibleOnly US citizens and resident aliens with a valid Social Security number are eligible for the Making Work Pay credit.
Anyone claimed as a dependent is not eligible for the credit. That means kids who are working, including college students who are still claimed as dependents, are not eligible for the credit. Because paycheck withholding is going to be adjusted by employers, working dependents may need to adjust the withholding manually to avoid owing tax at the end of the year.
Nonresident aliens, estates, and trusts also do not qualify for the Making Work Pay credit.
Revised Paycheck WithholdingThe IRS has revised the tax withholding tables so that taxpayers can see a tax benefit this year. Employers are required to implement the new withholding rates no later than April 1, 2009. Employees will not need to do anything to take advantage of the new withholding rates. You will not need to fill out a new Form W-4 to adjust your withholding.
However, individuals and couples with multiple jobs may need to adjust their withholding to have more taxes taken out if they expect not to qualify for the tax credit based on their total income. Similarly for working dependents (who are not eligible for the credit) or working retirees (who may be eligible for a reduced credit).
Self-employed persons could take advantage of the credit now by reducing their estimated tax payments. Since the credit is worth $400, estimated payments could be reduced by $100 per quarter.
Will Still Need to Claim the Credit on Your Tax ReturnThe Making Work Pay tax credit will need to be claimed on the 2009 and 2010 tax returns to ensure that the amount of the credit is properly calculated. This is true even though tax withholding is being adjusted now to reflect this new tax credit. The IRS explains it this way, "Though all eligible taxpayers will need to claim the credit when they file their 2009 income tax return next year, the benefit will generally be spread out over the paychecks they receive beginning this spring and continue until the end of the year." (Source: IR-2009-13)
Taxpayers will use new Schedule M for calculating the Marking Work Pay credit.
Modified Adjusted Gross IncomeFor the purposes of the Making Work Pay tax credit, modified adjusted gross income means total AGI modified to remove the foreign earned income exclusion.