New Tax Relief for Individuals

Most of you have heard that under the Obama Administration's American Recovery and Reinvestment Act you will be receiving a "Making Work Pay" tax credit. But what does this actually mean to you? When can you expect to receive the money?

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.

Note: This tax credit is 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 is typically handled by their employers through automated withholding changes. These changes needed to begin by April 1, 2009 and may 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.

It is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may choose to submit a revised W-4 to ensure enough withholding is held to cover the tax for his or her combined income.

If you have questions about the Making Work Pay provision, these questions and answers might help.

Making Work Pay Questions and Answers: General Issues

Q. What is the Making Work Pay Credit?

A. In tax years 2009 and 2010, the Making Work Pay provision will provide a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.

Q. How will taxpayers get this credit?

A. For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes to be made in early spring 2009. These changes may result in an increase in the amount of 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.

Q. How will the self-employed (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?

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

Q. Can private pensioners (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?

A. Private pension recipients are not eligible for the Making Work Pay credit 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. The IRS recommends 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, Withholding Certificate for Pension or Annuity Payments.

Q5. Are employees required to have a valid Social Security number (SSN) to be eligible for the Making Work Pay tax credit?

A. Yes, eligibility for this credit is conditioned upon providing a valid SSN.

Q6. If a taxpayer is eligible for more of a credit, how can it be claimed?

A. The modified tables take the anticipated credit into account through reduced withholding. However, the Making Work Pay credit will be reported on all filed 2009 income tax returns, along with the taxpayer’s withheld income tax. 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.

Making Work Pay Questions and Answers: Form W-4

Q1. Do I need to change my W-4?

A. Generally, for people who receive a paycheck, the credit will typically be handled by their employers through automated withholding changes. A Form W-4, Employee Withholding Allowance Certificate, 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. IRS Publication 919, How Do I Adjust My Tax Withholding?, provides additional guidance for tax withholding.

Q2. Should employees who are nonresident aliens or who can be claimed as a dependent on someone else's return ask for additional withholding on line 6 of the Form W-4?

A. Because nonresident aliens and those who can be claimed as dependents on someone else’s income tax return are not eligible for the Making Work Pay Credit, 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.

Q3. Will employers be required to determine if employees received the maximum credit and discontinue any further related withholding tax reductions?

A. Employers are not required to make determinations with regard to an employee’s eligibility for the Making Work Pay credit. Withholding should be made consistent with the employee's filed W-4 and the newly modified withholding tables.

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