Saturday, August 22, 2009

Making Work Pay Credit

This is probably the hardest one to explain, the one that affects the most people, and the one that will accidentally cause many, many taxpayers to be without a refund next year.

Here is a video provided by the I.R.S.

Eligible individuals are allowed a refundable income tax credit for tax years beginning in 2009 and 2010.
The amount of the credit is the lesser of:
• 6.2% of the taxpayer's earned income (money you perform work for), or
• $400 ($800 for a joint return).
You will hear all of us talking about the $400 credit, but if you have less than $6,451 ($12,902 for a joing return) in earned income, you will only be entitled to 6.2% which will be less than $400 ($800 for a joing return).

An “eligible individual” for purposes of the credit is any individual, except
• A nonresident alien;
• An individual who can be claimed as a dependent by another taxpayer (which means there is nothing extra for dependents on your tax return either); and
• An estate or trust.

Each tax return on which this credit is claimed must include the social security number of the taxpayer (in the case of a joint return, the social security number of at least one spouse must be included).

The credit is phased out at a rate of 2% of the individual's modified adjusted gross income (AGI) above $75,000 ($150,000 for joint returns).

Revised income tax withholding schedules are designed to reduce the taxpayers' income tax withheld for the remainder of 2009 in such a manner that the full annual benefit of this credit is reflected on each paycheck during the remainder of 2009. If you get paid weekly it would amount to about $8 per week or every other week should be about $15 per payday.

Then at the end of the year when you file your income tax, you will receive the credit up to $400 ($800 if married), but your withholding has been less most of the year so ideally it balances out to show that you have already received that credit during the year.

Effective only for tax years beginning in 2009 and 2010.

The problem comes with these tax tables. The tax tables (or their creator) think that every household is a 1 paycheck household, which in reality is not always true so we need to make adjustments for that. I am going to give you some examples of situations so you can see what you need to do. In each example I am assuming you fall under the income guidelines. If you exceed the $74,000 ($150,000 for married), then you have further complications.

1 - You are married, you and your spouse both are employed, both of you file married at work, and both get paid every week. With the new tax tables that took effect in April, you should be taking home an extra $8 per week and your income tax withheld would show about $8 less. But because you filed married at work on your W-4, they are holding out for you and your spouse to receive this credit, meaning your paycheck will be about $15 extra each week and then at the end of the year you get the $800 credit and it should balance out. BUT your spouse is getting this same thing happening to that paycheck. So instead of $15 less held out, together you are getting $30 less held out. The bottom line to this is that you are having about $1600 less held out for the year, and only getting $800 in credits, so you got $800 of your refund during the year and when you file your taxes, your refund will be $800 less than it was last year.

2 - You are single, have 2 jobs, get paid weekly at both. $8 a week less held out under the new withholding tables, $400 credit at the end of the year. But both of your employers are using the tables so you are having about $8 less held out each week from each employer. $800 less held out during the year, $400 credit at the end of the year. Your refund on your tax return will be about $400 less than for 2008.

3 - You are married, 1 has 2 jobs, the other one has 1 job, all are weekly pay. This case is really bad. $2400 less held out during the year (3 jobs x $800), $800 credit on the tax return, refund is $1600 less than the year before.

4 - Retired taxpayers drawing a taxable pension - The pension plans use the same withholding tables as working folks do. Social security recipients will be getting the $250 in May for their payment and those who draw a taxable pension do not get additional $400 credit. BUT their plan administrator is still using that same chart, so it is reducing the necessary withholding depending on how you filed with your plan. Let's say you are married, you and your spouse are both receiving a monthly, both of you file married on your W-4P, you will have $1600 less held out of your pension checks but you get $0 credit so you now have received the $1600 in your pocket all year and not going toward your income tax at the end of the year.

5 - Single with 1 job - You should be fine.

6 - Married with only one person working and only 1 job - You should be fine.

7 - Self employed people - You should be fine.

8 - Retired folks who are paying estimated taxes instead of having it held out of their retirement checks should be fine.

Above all, if you have any doubts at all, feel free to call on us for assistance so we can prevent any surprises at tax time.


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