5 Things to Know About the "Making Work Pay" Tax Credit

Still confused? Here's the skinny on what you'll get, what you may have to pay back and when.

By Kevin McCormally, Editorial Director, Kiplinger.com

April 2009

1. Don't look for a check in your mailbox. Rather than resurrect the multi-million-dollar bureaucracy that delivered tax rebates in 2008, President Obama's version of cash-to-taxpayers stimulus is being parceled out primarily via reduced tax withholding from paychecks. The withholding change is automatic -- you don't have to do anything to get your money -- and most employees should already be enjoying higher take-home pay.

Scaled-back withholding was supposed to go into effect by April 1 -- except for high-earning taxpayers. That's because the "Making Work Pay" credit, (that's what Washington calls it) phases out as income rises between $75,000 and $95,000 for single filers and between $150,000 and $190,000 for couples who file joint returns. Because top earners won't get the credit when they file their tax returns next spring, they don't benefit from trimmed-down withholding either.

The hike in your take-home pay may seem paltry compared with last year's rebates, which paid single taxpayers $600 and married couples $1,200, plus $300 for each qualifying child. The change in withholding is worth just $45 a month for singles and $65 for married workers. (Seniors, an important exception to this don't-watch-your-mailbox rule is explained in item #3.)

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2. Most taxpayers won't have to pay back higher take-home pay. Some skeptics worry that lower withholding today will mean a smaller tax refund next spring. But for most taxpayers, reduced withholding reflects the fact that they'll owe less tax for 2009. The Making Work Pay credit will reduce tax bills by 6.2% of taxable wages received in 2009, up to a maximum of $400 for single taxpayers and $800 for married couples filing jointly.

In some cases, though, next year's refund -- and most taxpayers do get refunds -- might be affected. A single taxpayer who gets just $380 via reduced withholding, for example, will get the extra $20 in a bigger refund. However, two-earner married couples could see their refunds drop. The new withholding tables are designed to give a married worker about $600 in extra take-home pay between April and the end of the year. So a working couple will enjoy $1,200 in reduced withholding ... but they'll get a single $800 credit at tax time. The difference translates as a $400 bite in next year's refund.

3. Seniors should check their mailboxes for a check. Retired folks don't have paychecks to beef up by cutting withholding. But Congress wanted to give most of those people some extra spending money, too. Retirees who receive Social Security, Railroad Retirement or Veterans Administration retirement benefits -- and who were on the rolls in November or December 2008 or January 2009 -- will get $250. (Those who first received benefits after January 31 won't get this payment.)

Eligible individuals will automatically receive their money the same way they receive their benefits. If your benefits are directly deposited to a bank account, you'll get an extra $250 deposit; if your benefits come in the mail, watch your mailbox for an extra check. The government hopes to make all the payments by the end of May.

Retired government employees who don't receive Social Security won't get a $250 payment, but they will be allowed to reduce their 2009 tax bill by claiming a special $250 credit when they file their 2009 returns next spring.

4. Working retirees will have to pay back the $250. If you get the $250 payment in May but are still on the job -- perhaps because you returned to the workforce after retiring -- don't even dream about double dipping. The Making Work Pay credit you claim when you file your 2009 tax return will be reduced dollar for dollar for the $250 payment you receive as a Social Security, Railroad Retirement or V.A. beneficiary.

Couples with one retired spouse who gets the $250 payment and one working spouse who benefits from reduced withholding will also see their Making Work Pay credit squeezed by $250.

5. Students with part-time and summer jobs will pay later for reduced withholding now. If you can be claimed as a dependent on your parents' tax return next spring, you do not get a Making Work Pay credit. But you will enjoy lower withholding from your paychecks. That effectively means you'll wind up paying back the extra take-home pay dollar for dollar by owing more -- or getting a smaller refund -- when you file your 2009 tax return in 2010.

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