Making Work Pay Credit

The Making Work Pay Credit was replaced by the Payroll Tax Holiday and will not impact your tax return.  The Payroll Tax Holiday gives you a tax benefit in the form of higher paychecks with the reduction in the amount of Social Security taxes(reduced by 2-percentage points) taken out of your paycheck.

I wanted to go ahead and ask some of the more popular questions to help tax filers get the most up to date information.

What is the Making Work Pay Credit?

The Making Work Pay credit was just one piece of the American Recovery and Reinvestment Act of 2009. What made it popular with tax fliers was that it was a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers (provided that filed jointly).

Tax credits are important because they directly reduce your tax liability. Most tax credits we’re familiar with, like the earned income tax credit or the lifetime learning credit taken as we file our taxes and meet the qualifications.

However with this credit, changes were made to the federal income tax withholding tables.  Many workers saw this tax credit reflected as an increase in their paychecks through the year. (Self-employed workers could claim this credit when they filed their taxes.) It was meant to be a micro-stimulus for families as the United States government was hoping households would spend more.

Who Could Claim Making Work Pay Credit?

Like many tax credits, there are specific criteria that had to be met for tax filers to get this credit. The credit was not available for individuals who had a modified adjusted gross income that was $95,000 or higher and married couples (filing jointly) who had a modified adjusted gross income of  $190,000 or higher. Those receiving the credit were also required to have a valid Social Security number.

Can I Get the Making Work Pay Credit for My 2011 Tax Filings?

No, it has expired. fortunately there other other options. While you can’t use the Making Work Pay Tax Credit, there are plenty of deductions and tax credits out there that can help you lower your tax burden and possibly increase your tax refunds.

The big benefit of using tax software and sites like TurboTax  is easily finding which tax credits you qualify for without poring over all the updates from the IRS. You also have tax experts you can contact to get answers to your tax related questions.

Thoughts on Tax Credits

Even if you’re not a fan of filing taxes, it’s really to your advantage to make sure you try to get every tax credit you can qualify for when you file your taxes.

Tax deadline: April 18th!

Did you know that you have few extra days to file your federal taxes this year? That’s right – you have until April 18th to get everything in order and filed (to avoid conflicts with Emancipation Day).  Just remember: this is both the deadline to file, and the deadline to pay. If you owe the government money, even if you file an extension, you must pay your best estimate–within 90% accuracy–of what you think you owe or you’ll be hit with interest and penalties on any balance due.

Unemployment benefits ARE taxable

There’s some confusion here, particularly since in the 2009 tax season, an exemption was given for the first $2,400 in unemployment benefits. Sorry, but that break has expired for tax year 2010. Unemployment benefits are considered taxable income and must be reported on your federal tax return.

You may be eligible for the EITC

Maybe you weren’t eligible for the Earned Income Tax Credit last year or even the previous year, but you may be eligible this year as you may have seen your income take a bit of a hit.  And you’re not alone.  Many individuals and families, previously classified as “middle class,” are now eligible for this tax break which are designed to supplement wages for low to middle-income workers. To determine whether you qualify, use the EITC Assistant, an interactive tool that’s available on IRS.gov.  All you have to do is answer a few simple questions to find out if you qualify and if you do, this credit could be worth a whopping $5666 this year.

Consider weather-related tax breaks

It’s been a brutal winter! And while homeowners insurance can protect your home and possessions during damaging weather, what you might not realize is that you may be able to deduct storm damages — providing the damage meets the definition of a casualty loss.  What’s that? A casualty loss is something that happens suddenly and unexpectedly (like a roof collapsing due to heavy snow) as opposed to something that happens gradually (such as water seepage in a basement).

Claim the Making Work Pay credit

If you were eligible for this tax credit, the government simply took less money from your paycheck (a single taxpayer was eligible for up to $400 last year; married couples, up to $800), but that’s not the official credit claim.  To account for this money, you need to do a little extra work and file Schedule M.

Although you might not have noticed, your federal income tax withholdings from your paycheck were adjusted in your favor during 2009 and 2010.

You: Why?

The change was made automatically to account for the Making Work Pay Credit.

You: Didn’t work already pay?

For most people.

You: Then what’s this credit for?

An opportunity to receive even more money from the same amount of work.

You: I like the sound of that. But you said I have the money already, yes?

Yes.

You: So I don’t need to fill out any special forms then, right?

Wrong.

You: What? You just said I already have the money.

Although you effectively received the Making Work Pay credit money via your larger paychecks, you still need to file a Schedule M with your 2010 tax return.

You: And if I don’t?

You will not find out if you received full credit in your paycheck, are due more, or in some cases may not have had enough withheld. You may also have an error in your tax return and it will not match IRS records. Or you can put, you may be giving money back that is owed to you.

You: Why?

When you file Schedule M, you claim your credit. Also, the IRS has information regarding payments that may reduce your credit like the Economic Recovery Payment. You have to put Economic Recovery Payment information on schedule M.

You: Is all this, pardon the expression, work worth it? How much money are we talking about here?

Four hundred dollars for a single person. If you’re married, $800 total.

You: Woah – okay. I’m on that. Is everyone eligible?

Almost everybody.

You: Here it comes. Who doesn’t get the credit?

Ineligible taxpayers are people who:

• Didn’t work in 2010

• Are non-resident aliens

• Can be claimed as a dependent on another person’s return

• Made too much money

• Do not have a valid social security number

You: Made too much money in whose opinion?

Congress.

You: Seriously?

Seriously.

You: How much is too much?

More than $95,000 if you’re single; twice that—or more than $190,000—if you are married and filing jointly.

You: So if I don’t qualify for the credit?

You won’t get the money. But then again, you won’t have to file Schedule M.

You: A silver lining to be sure; but I’d rather fill out the form and get $400.

Good—odds are, you qualify. Go get your money. Where else are you going to make $400 by just filling out a form? And more good news, TurboTax automatically calculates Making Work Pay Credit for you. Just for kicks, here’s an overview of How to File Schedule M.

There are a number of tax benefits scheduled to expire this year, and many require that you take action soon if you want to see a higher refund or a lower tax bill next year. There is always a chance — in fact, I can guarantee — that Congress will make more changes to tax laws before it’s time to file in April 2011. For now, consider taking advantage of some of the credits and deductions that may not be around next year.

Homebuyer Tax Credit

One of the most popular benefits is the updated Homebuyer Tax Credit. If this is your first time buying a home, the government wants to give you up to $8,000. If you’ve lived in your current home for a long time but move to a new house, you could receive up to $6,500.

Unless extended by Congress, you must buy a qualifying house by the end of June this year. There are other restrictions as well, including income limitations. Make sure you’re familiar with all the rules before expecting the credit. Experts aren’t expecting this credit, already extended once, to be extended again. Time is running out, but the decision to buy a house should not be based solely on the existence of a tax credit.

Adoption Credit

Just a few weeks ago, Congress extended tax credits for adoption expenses to 2011, so there is now an extra year for taxpayers to receive some of the expanded benefits that have been put in place recently. Parents who adopt a child can receive a credit of up to $13,170 to help cover expenses spent during the adoption process.

American Opportunity Tax Credit

One new tax law of the 2009 economic stimulus was a new credit to help pay for college expenses such as tuition. The Hope Credit was expanded into the new American Opportunity Tax Credit, increasing the benefit students and parents can receive on their 2009 and 2010 taxes.

For any of the first four years of higher education, students or their parents (if the student is a dependent) can claim $2,500 in 2009 and 2010 to offset the costs. Up to $1,000 of this credit each year is refundable, which means you will receive the credit even if you have no other tax liability. This is a benefit for students who may not have much other income.

Unless Congress changes the rules again, the American Opportunity Tax Credit will expire at the end of the year. It will be superseded by the older Hope Credit, which provides a smaller benefit.

Making Work Pay Credit

Most people are receiving the Making Work Pay Credit without even knowing it. Rather than receiving this credit as part of your annual tax refund, most people have been receiving a small amount extra in their paychecks since April 2009 and will continue receiving this extra amount through the end of the year.

If you do not have regular tax withholding through your job or if you elected not to receive this extra money in your paycheck, you were able to claim the Making Work Pay Credit on your taxes and will be able to again in 2010. This is another tax rule enacted by the 2009 economic stimulus, and it will expire at the end of this year.

Low capital gains tax rates

Since 2008, investors have benefited from low tax rates on investments. For example, taxpayers in the 15% bracket can sell stocks with long-term capital gains without owing any taxes. In 2011, this tax will return to a rate of 10%. At all income levels, taxes on investments will increase. Currently, the dividends from some investments are taxed at these lower rates, but in 2011, dividends will be taxed at the same rates as ordinary income.

Stay tuned for more updates

The tax system is designed to be adjusted when necessary to react with current economic issues. Keep checking the TurboTax Blog for the latest updates when tax laws change, affecting taxpayers and their wallets.

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.