Making Work Pay and Government Retiree CreditsPosted on January 13 2010 by admin
There is a new credit on the Form 1040 this year – computed on the new Schedule M (see prior post on Schedule L and Schedule M). This credit is named the Making Work Pay and Government Retiree Credit and will be located on your 2009 Form 1040 on line 63. This credit came about in the American Recovery and Reinvestment Act (ARRA) of 2009.
The gist of the credit is that you were to get a reduced amount of withholding during 2009, which put the credit in your pocket right away during the year. The percentage of the credit coincides with the social security tax percentage of 6.2%. The maximum amount of the credit is $400 ($800 married filing jointly).
New tax law, similar to many other new and shiny things, is not always as it seems. First, there is an adjusted gross income limitation on this credit ($75,000 single, $150,000 married filing joint). That means that not every working family will actually be able to receive the credit. However, the withholding tables do not take your adjusted gross income into consideration when the amount withheld as federal income tax from your gross pay is calculated.
This can best be shown with an example. If you have a married couple and the husband has an annual salary of $70,000, then his federal withholding was reduced by the 6.2%, in accordance with the law. However, his wife has an annual salary of $125,000. Her salary is not reduced with the new withholding tables, and, as a couple filing joint, they are not entitled to the $800 credit. So – his withholding was reduced, putting more money in his pocket. But there is a potential for an underpayment, since the husband had less money withheld from his pay.
Now that we have worked through the new law for those individuals that receive a paycheck, let’s tackle the individuals that receive social security. Since there would not be a regular paycheck, ARRA gave each retiree a one time $250 payment. This payment would have been sent earlier in 2009.
Finally, if you are working and receiving social security benefits, you are not entitled to both of these credits. The Making Work Pay Credit will be reduced by the amount of the Government Retiree Credit received.
And that, tax filer, is the reason that you will need to prepare a Schedule M for 2009. And 2010. The credit is set to expire after December 31, 2010.
By Donna H. Laubscher, CPA
There is nothing more complex than the world of taxes. We know this and yet we chose careers where we face these issues everyday. We get questions day in and day out about new tax laws, forms and news items and how they affect everyday people and businesses. Well, here at Henry & Horne, LLP we have set out to do what we do best; help everyday people understand what is going on in the world of state, local, federal, estate and international taxation. We will provide these weekly posts and we encourage you to give us feedback on those posts as well as letting us know what else you would like to know more about. Welcome to "Tax Insights." We hope you find this blog informative and worthy of your time.
Before posting a comment on a blog post please be aware that we do not give free tax advice to non-clients by email, comment response, or phone. Thank you!
- Temporary Regulations Provide Guidance on Form 5471
- New Like-Kind Exchange Reporting Required for California (IRC 1031)
- Survey Suggests Taxpayers are Overconfident in Their Tax Prep Skills
- Timing Rules for SEPs and SIMPLE-IRAs Part II
- Timing Rules for SEPs and SIMPLE-IRAs Part I
- Are You an Identity Theft Victim?
- Supreme Court Decides Severance Pay is Subject to FICA Tax
- Mamma Mia! Who Can Deduct That?
- IRS Releases New Requirements to Claim the Earned Income Tax Credit
- AMT Facts with Exemption Amounts Updated