NOTE: This page explains the $400/$800 tax credits and related reduction in tax withholding from paychecks for 2009 & 2010. See our BUSH 2008 REBATE & STIMULUS PAYMENT page for an explanation of the Bush administration $600/$1200 stimulus payments mailed out in the summer of 2008 and reconciled on your 2008 tax return.

CONFUSION ABOUNDS (AGAIN)

Many taxpayers are even more confused about how the Obama administration's "Make Work Pay" Credit and the related reduction in payroll tax withholding in 2009 & 2010 works than were confused by the Bush administration's stimulus payment checks. 

HOW DOES THE WHOLE THING WORK?

In February, President Obama signed the "American Recovery and Reinvestment Act of 2009" (this was the massive $787 billion stimulus bill that dominated the news at the time).  Included in the bill was the "Make Work Pay" Credit of up to $400 for singles and $800 for joint filers in both 2009 & 2010. 

The Obama administration decided it needed to stimulate the economy.  It decided to do this by cutting most taxpayers'  2009 & 2010 tax bills by giving them a tax credit.  However, they faced the same problem problem the Bush administration did: taxpayers wouldn't receive their tax credit for a given year until the spring of the following year when tax returns are actually filed.  Both administrations wanted to get the cash into taxpayers' hands much earlier than the following spring so taxpayers could spend it and hopefully create jobs. The Bush administration decided to mail out stimulus payment checks in the summer of 2008 as an "advance" on the credit.  The Obama administration decided to pay in advance too, but by reducing the federal income tax withholding on workers' paychecks by a small amount each pay period instead of the larger single lump sum check approach of the Bush administration.   

While the reduced withholding scheme will work out fine for millions of workers, the Obama administration plan could, depending on your individual situation, "backfire" and cost you come April 15, 2010: 

• If you are single and work two or more W-2 jobs, each of your employers may reduce your withholdings by $400, but the credit is only $400 in total.  So at tax time your refund will be reduced or you could owe up to $400 for each extra job.
•  If you are someone else's dependent, such as a college student working a part-time job, you could get the extra $400 in your paycheck only to find you have to repay it at tax time.
• If you file a joint return and both work as W-2 employees, and are considered "high income" ($150,000 for joint filers) you may end up paying back the extra dollars you received in your paycheck since you will not be entitled to a credit to reduce your taxes but your withholding had been reduced even though your taxes were not.

• If you are a low income worker, you may not receive the full tax benefit.  This is because that while the credit is 6.2% earned income, some low income workers have less than that percentage withheld from the paychecks for income tax to begin with.  As a result, these workers will have to wait until they file their tax returns to get the remainder of the tax benefit to which they are entitled.

• If you are self-employed or an independent contractor, since you have no withholding you will have to wait until you file your return to realize your tax benefit.  Although if you file quarterly estimated payments you could adjust those throughout the year.
• If you are a social security recipient, veteran, or get SSI and receive the $250 economic recovery payment (which is just a straight-up payment, not a tax credit) being handed out to certain recipients of social security, railroad retirement, veterans compensation or pensions, or supplemental security income (SSI) it reduces the amount of your "Making Work Pay" Credit.
• If you claim the refundable $250 special tax credit for certain government retirees it will reduce the amount of your "Making Work Pay" Credit.  If you or your spouse have W-2 earnings, you can expect to owe an additional $250 in tax when you file your return since the reduction in withholding from your paycheck does not take the affect of this special tax credit on the "Making Work Pay" Credit into account.
• If you have taxes withheld from your pension, you could end up owing on April 15.  Pensions are not earned income and do not qualify for the new credit.  However, the withholding tables have been adjusted to reduce your withholding as if they did qualify. 

Questions on this topic?

We have published this page as a public service. 

While we welcome questions from our paying clients, we cannot answer inquiries regarding this topic from the general public as that would take away from our time serving our valued clients.  We suggest that you contact your own tax preparer with any questions regarding this topic (assuming it is not a software box, as it would look really odd to be talking to a box). If your current tax preparer can't or won't answer your "Making Work Pay" Credit questions you should strongly consider switching to a professional tax advisor.

If you aren't getting the service you deserve from your current tax preparer or have decided that you need the services of a licensed tax practitioner, please contact us to arrange an appointment for our professional services at a reasonable cost.