New Making Work Pay Credit

“Making Work Pay” is a new credit which the Obama administration says will cut taxes for more than 95% of working families in the United States.  It provides a refundable credit of 6.2% of a taxpayer’s earned income not to exceed $400 for individuals and $800 for joint filing couples. 

Eligible individuals will receive an income tax credit for two years (tax years beginning in 2009 and 2010). This new credit will reduce an individual’s tax liability on a dollar-for-dollar basis. Any excess over a taxpayer’s tax liability will be funded.  Nonresident aliens, estates, trusts, or individuals who can be claimed as a dependent on someone else's return do not qualify for this credit.

The credit is the lesser of:

• 6.2% of an individual's earned income or

• $400 ($800 in the case of a joint return).

Example - For individuals with earned income above about $6,451, the credit maxes out at $400 ($6,451 x .062).  For married couples filing jointly with earned income above $12,902, the credit maxes out at $800 ($12,902 x .062). Thus, the credit for individuals above those income amounts will receive the maximum credit, while those below will receive a reduced credit.

Unlike the 2008 stimulus rebate, this credit will not be paid out in a lump sum.  For taxpayers who receive a paycheck, the credit will automatically start showing up in their paychecks this spring through automated withholding reduction.  For others, such as self-employed individuals, the credit can be claimed when their 2009 tax return is filed next year.

This credit phases out at the rate of 2% of modified AGI, starting at $75,000 for individuals and $150,000 for joint filers.  It is fully phased out at $95,000 for individuals and $190,000 for joint filers. 

If you are an employer, keep your eye out for the updated version of Publication 15 (Circular E), Employer’s Tax Guide, which will provide more details and updated withholding tables for employers.

Please call this office if you have any questions.

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