tax credit

The Tax Attic – May 28, 2008

May 28, 2009 // 0 Comments

Making Work Pay tax credit problematic The provision of the American Recovery and Reinvestment Act of 2009 that is of most concern to tax professionals around the state of Michigan and the entire country seems to be the one titled the Making Work Pay tax credit. I have written about this credit previously, but feel that it is so problematic that I have to write one more article about it. The basic premise of this credit is that taxpayers will receive an additional $13 to $25 per week of take-home pay during the years of 2009 and 2010. For a single person, this should amount to about $400. For joint filers, this should amount to about $800. The credit is the smallest of 6.2% of earned income or $400 single/$800 joint. When the 2009 tax return is filed next year, a single working taxpayer will claim the Making Work Pay tax credit of $400 on the return and, since that person’s withholding should have decreased by about $400, all things being equal, the tax return shouldn’t look much different than this year’s return. Similarly, when the joint working couple file their return in 2009, their withholding should be about $800 less, but they will get the $800 Making Work Pay tax credit, and all should be okay. The taxpayers’ tax burden will have been reduced by $400 or $800 and everyone is happy. However, there are potential problems that will result in some taxpayers not ending up in that happy place. One of the key words in the entire provision is the second word of the provision:  Making WORK Pay tax credit. In other words, for taxpayers who do not work and do not have earned income, there is no Making Work Pay tax credit. That is where problem number one arises. When the Internal Revenue Service was instructed to implement this credit and adjust the withholding tables so that taxpayers would get the $13 to $25 additional take-home pay, there was a small communication error. They did not instruct all of those entities issuing pensions to ignore the new tables. The Making Work Pay tax credit does not apply to pension recipients. Pension income is not earned income and does not qualify as work […]