written by Patti Stoner

Patti Stoner head shot

Your federal tax withholding has recently been reduced and there may be a consequence come tax time. In all likelihood, the reduction is attributable to the Making Work Pay Credit.Enacted as part of President Obama’s big economic stimulus package, the Making Work Pay Credit puts a little extra money in each person’s paycheck. The credit is implemented through new withholding tables that went into effect April 1, 2009. The credit gives single taxpayers up to $400 and married filing jointly taxpayers up to $800 additional take-home pay over the course of the year. This benefit is in effect for 2009 and 2010.

Not everyone qualifies for the credit. The credit is unavailable for those taxpayers who are claimed as a dependent on another taxpayer’s return; nonresident aliens; and estates and trusts. Social Security numbers are required to be eligible for the credit. The credit phases out if the taxpayer’s modified adjusted gross income falls between $150,000 and $190,000 for married filing jointly taxpayers, and $75,000 and $95,000 for other taxpayers. Above the phase out limits, no credit is available. In addition, the credit amount is reduced by the $250 “economic recovery payment” for recipients of Social Security, Supplemental Security, Railroad Retirement benefits, and Veterans Disability Compensation and Pension benefits.

The new withholding tables, according to the IRS, are designed to give single taxpayers’ an extra $400 and married filing jointly taxpayers’ $600 each (total of $1,200, even though the maximum credit is $800) for the remainder of 2009. However, the increase in one’s paycheck may cause some taxpayers to pay back money when they file their 2009 income tax returns, either by a lower refund or owing more taxes. In general terms, if your new withholding amount equals the credit you qualify for, no action is required. If your new withholding is more than the credit amount you qualify for, you will have to make a withholding adjustment or pay back the excess when you file your tax return. If your new withholding is less than the credit amount you qualify for, you will get the difference when you file your tax return.

The following taxpayers will want to check their withholding to see if they need to file a new
W-4 to prevent an unwelcome surprise come April 15: working married couples; working taxpayers whose unearned income (i.e., investment income) puts them above the phase out amounts; dependents with taxable income; workers with multiple jobs; retirees who have withholding from their pensions; and Social Security recipients who work. In addition, because nonresident aliens and those who can be claimed as dependents on someone else’s income tax return are not eligible for the credit, the new withholding tables may cause them to be under withheld.

Be reminded that if you are under withheld, you may be subject to a penalty.

If you fall into one of the above categories, please contact our office so we can advise you on what steps can be taken to alleviate any potential tax surprise.