"Making Work Pay" Tax Credit - Avoid Having to Pay It Back!
by: Iowa Legal Aid
What is the "Making Work Pay" Tax Credit?
Congress passed a law this year to reduce income taxes on workers for 2009 (the "Tax Credit"). To get this money to taxpayers, they reduced the taxes withheld from paychecks. If you are married and file jointly, the Tax Credit could be up to $800. For all other working taxpayers, the Tax Credit could be up to $400.
Who should be concerned about having too little withheld?
There are three main groups who may have too little withheld from their earnings:
- People getting a $250 Economic Recovery payment who still work;
- Workers with more than one job; and
- People receiving pensions.
People Getting the $250 Economic Recovery Act Payment Who Still Work
In 2009, people getting Social Security, Railroad Retirement, VA or other eligible state or federal retirement payments will receive a one-time Economic Recovery payment of $250 (the "Recovery Payment"). This can cause problems for people who are still working because this $250 Recovery Payment reduces your Tax Credit. For example, if you are getting Social Security and still working and your employer lowers your tax withholding by $300, your Tax Credit plus $250 Recovery Payment would equal $550. In this example, you would have to repay $150 at tax time because you are limited to a $400 maximum combined benefit.
Workers with More Than One Job
Workers with more than one job will have less money withheld by each employer. This could cause problems. For example, if you work two jobs and each employer withholds $300 less, then you would have a total of $600 in total Tax Credits at the end of the year. Since the maximum Tax Credit for an individual is $400, your credit would be $200 too much. In this example, you would have to pay $200 back at tax time.
People with Pensions
The IRS issued new withholding charts to employers to reduce how much was being taken out of paychecks. The catch is that pension plans use these charts to calculate withholdings too. The Tax Credit is for those currently working, not those who are retired and only receiving pensions. While the IRS issued new pension withholding tables in May to fix this problem, pension plans were not required to use it. If your pension plan did not adopt the new withholding table, then you could get Tax Credits you are not entitled to and would have to pay it back at tax time.
This repayment problem can be even worse for people who fit in more than one of the above groups. For example, people with pensions who also (a) get the $250 Recovery Payment, (b) get more than one pension, and/or (c) still work, could have an even more serious repayment problem at tax time.
How Can I figure Out How Much I Should Have Withheld?
You can go to IRS.gov to use an on-line withholding calculator. This calculator can help you figure out whether you need to have more withheld. You will need to know several things like your filing status, number of dependents, your most recent pay stubs or pension benefits, and withholdings to date. If the calculator shows you are not having enough withheld, you can file a new W-4 with your employer or W-4P with the pension plan to adjust your allowances or increase the amount being withheld.
What if I need help using the withholding calculator?
You may be eligible for help from Iowa Legal Aid.
- Call Iowa Legal Aid at 1-800-532-1275
- If you are getting a pension, or are 60 or older, call the Legal Hotline for Older Iowans at 1-800-992-8161.
- People who speak Spanish may call 1-800-272-0008.
| The information in this article was not intended or written to be used and cannot be used to avoid penalties under the Internal Revenue Code. |
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