Taxes 101: Make Work Pay

Tax Tips

One provision of the American Recovery and Reinvestment Act of 2009 was a tax credit that came to be called Making Work Pay. As the name of this credit implies, it is only for those with earned income.

The value of this benefit is 6.2% of your income up to $400 for a single person or $800 for a married couple. You’ll notice that his is the same percent as the Social Security portion of your payroll (FICA) deduction, and the withholding tables were adjusted accordingly in July of this past year (2009). Most workers should have seen their paychecks adjust accordingly.

The credit is reduced or completely eliminated if your MAGI is within or above a certain income range. If your filing status is single, the phaseout range is $75K-95K. If you are married and filing jointly, your phaseout range is $150K – 190K.

On a side note – you can see the phaseout occurs at a rate of 2%, i.e you lose the $800 over a range of $40,000 in income. As you plan your finances for 2010, keep in mind this 2% is a phantom rate added to the marginal 25% or 28% you might otherwise fall in. The best way to understand this is to look at your nearly completed tax return on TurboTax and raise or lower your charitable deductions by $100 cash. This will show you your effective marginal rate most precisely.

The credit doesn’t come without a bit of effort on your end. Even though you may have seen the extra money in your paycheck you have a bit of paperwork to fill out to make sure you don’t lose it at tax time. There’s a new schedule M. This form is brief and straightforward, just a few minutes to complete, and you’ve claimed your credit. If you file the 1040EZ you will just use the worksheet, and not the Schedule M.

This credit will again be available in 2010, and, with the income restrictions removed for Roth conversion, may impact how you choose to handle the taxes on it, paying in 2010 or spreading the conversion income over the next two years.

Last, it’s important to note that as a credit, you are eligible to receive it (or as much as you are entitled to) even if you have no federal tax liability at all. So long as you had earned income it’s worth the effort to claim this money that’s rightfully yours.

Comments (3) Leave your comment

    1. Hi Cara,
      The Make Work Pay Credit expired December 31, 2010, which is why the payroll tax holiday was passed, which lowered Social Security Tax taken out of your paycheck from 6.2% to 4.2%. The payroll tax holiday was set to expire 12/31/2011, but was extended until the end of February 2012 until Congress votes on a long-term bill. You will not see any option to take the Make Work Pay Credit in 2011 since it expired in 2010. You just received bigger paychecks in 2011.
      Thank you,
      Lisa Greene-Lewis

    2. Hi Cara,
      No, making work pay expired in 2010. You received more income in your paychecks in 2011 due to the payroll tax holiday available.
      Thank you,
      Lisa Greene-Lewis

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