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