A Tax Tip from The Tax Institute at H&R Block

As part of the February 2009 American Recovery & Reinvestment Act (a.k.a 2009 Stimulus Act), approximately 95% of America’s working families became eligible for a ‘Making Work Pay’ refundable tax credit of up to $400 for working individuals and up to $800 for working couples. Accordingly, the IRS revised the withholding tables used by employers and payers of pensions, and companies had until April 1 to institute the new withholding tables. Employees then began benefitting from the revised tables, with larger take-home paychecks. Most important, the revised withholding tables are for calendar years 2009 and 2010.

So what’s the problem?
The problem is that because the IRS withholding tables cannot take into account ineligible taxpayers, workers with multiple jobs, or dual-income married couples, the reduced withholding may actually exceed the credit that you’ll be able to claim when you file your tax return next year and in 2011 and that may mean a smaller refund or larger balance due. And there’s more.

What determines if I qualify for the full benefit?
The tax credit is calculated at a rate of 6.2% of your earned income (or joint income if filing MFJ - Married Filing Jointly). If you earn at least $6,452 ($12,903 MFJ) and are not phased out of the credit, you will claim a credit of $400 ($800 MFJ). If your withholding was reduced by $400 ($800 MFJ), you are “even” for the year. If your withholding was reduced by less than $400 ($800 MFJ), you will effectively get the benefit of the rest of the credit when you file your return.

Eligibility for the ‘Making Work Pay’ credit starts to phase out for individuals with adjusted gross incomes over $75,000 and phases out completely at $95,000. For couples, the phaseout starts $150,000 and completely phases out at $190,000.

Remember, too, that not all workers qualify for the Making Work Pay Credit (MWPC). Individuals who are a dependent of another taxpayer and individuals who do have an Individual Tax Identification Number (ITIN) will find that their withholding is reduced the same as for other workers, even though they don’t qualify for the MWPC (unless they are married and file a joint return with a spouse who is eligible to claim the credit).

Let's look at some examples
A married couple, for example, could EACH have up to $600 reduced withholding during April through December 2009 ($1,200 combined). Their maximum credit on the 2009 return will only be $800, however.

A single taxpayer, who has two jobs, may have $400 less withholding from EACH job for a total of $800 in reduced withholding. His maximum credit on the 2009 return will only be $400.  Each case potentially results in either a lower refund or a higher balance due for the taxpayer.

Do I have to accept the reduced withholding in 2010?
You should first talk to your tax professional or use the H&R Block ‘Making Work Pay’ Calculator http://www.hrblock.com/cmpgn/making_work_pay.html.  When using the new W-4 Withholding Calculator, pay close attention to your 'Total Withholding' calculation.

If after using the ‘Making Work Pay W-4 Calculator,’ you determine you don’t want your withholding reduced again next year, you do have an option: you may prefer instead to have the benefit in a lump sum with your refund when you file your 2010 tax return in 2011, but you’ll need to file a new W-4 with your employer to request that your withholding be increased to the desired amount.

What else should I know?
Adult recipients of Social Security, Railroad, SSI, and Veterans Retirement or Disability benefits, who also have W-2 income, should be aware that the $250 one-time Economic Recovery Payment which they automatically received earlier this year reduces any allowable Making Work Pay Credit that they’ll be able to claim on the 2009 Tax Return next year.

Need more help?
Call 1-800-HRBLOCK to find an office near you to schedule a free tax checkup.

This Tax Tip Article is brought to you by The Tax Institute at H&R Block.

To view other helpful tax tip information, visit the H&R Block Community, Digits, at www.digits.hrblock.com

As always...everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Tip Article is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.