Making Work Pay problems revisited

Timing is everything, especially with taxes ... and tax information.

On March 5, I blogged about the potential tax problems some folks might face in connection with the Making Work Pay credit.

You know this tax break. It's the centerpiece of the Obama stimulus, formally known as the American Recovery and Reinvestment Act, that became law on Feb. 17.

The deal is that workers get a $400 credit, which offsets the 6.2 percent employee portion of the Social Security withholding taken out of paychecks. But rather than make us wait until we file our 2009 returns next year, the money is being doled out incrementally now via our paychecks. That process started on April 1.

For most folks, it's not an issue. You just sit back and collect a few extra dollars each pay period.

Ineligible credit recipients: Now, however, this topic, which I and many of my tax-blogging colleagues discussed months ago, is getting attention from the mainstream media. Or, as taxgirl puts it, "they aren't breaking news, they're just playing catch up."

And that means those of us ahead of this issue are getting questions from readers that we thought we already answered. So I thought it best that I briefly run through the issue and potential impacts one more time.

As I noted in my blog item of two months ago, some folks who are automatically collecting this extra money could run into trouble when they file their 1040s next year.

Some workers, most notably younger ones who also are claimed as dependents by their parents, are not eligible for the credit.

Also, because the credit is reduced for folks who earn over a certain amount, some couples where both husband and wife work might exceed that threshold. That means they shouldn't get the full $400 per person credit amount this year.

Other "at-risk" taxpayers include workers who hold down multiple jobs, as well as retirees who have federal income taxes withheld from their pension payments and Social Security recipients who also have taxable income paying jobs.

"The IRS has said that the new withholding tables reflecting the Making Work Pay Credit should be used for pension payments as well as wages, but since the credit only applies to earned income, this would lead to under withholding," notes Mark Luscombe, a CPA and Principal Federal Tax Analyst with the tax software and publishing company CCH. 

Accounting for unexpected issues: So what does all this mean in the real, how much do I owe the IRS world?

Every year, most people end up getting federal tax refunds, meaning that over withholding is more common than under withholding to begin with. IRS data on 2008 returns filed through April 24 shows that almost 97 million taxpayers had received refunds, with the average check coming  to $2,683.

So if that trend continues, which it probably will, and the refund amounts for 2009 are anywhere close to 2008's check amounts, folks who are collecting too much credit now will probably still get a refund check but it will be just a slightly smaller,

"Also, many people opt out of withholding on monthly pension checks," says Luscombe, "so they won’t be affected one way or the other."

In cases where a person is not eligible for the stimulus money, such as working dependents or certain pensioners, they'll have to pay it back when they file. But again, since many of these folks probably get refunds anyway, the improperly received Making Work Pay money will just come out of that refund amount. Or they'll owe a bit.

If, however, you are worried that you're getting too much of the credit now, you can go ahead and adjust your withholding. The IRS even has an online calculator that reflects the new stimulus act withholding tables to help you get your amount just right.

Related posts:

• Retiree $250 stimulus checks on the way
• Making Work Pay payroll considerations
• OK, some rebate checks