How Much Is the Making Work Pay Credit?

Originally, the credit was a 6.2% credit on an individual’s earned income with a maximum $400 credit for individuals and $800 for married taxpayers. The credit is reduced by $250 for Social Security recipients, retired railroad workers, and disabled veterans who received a $250 Economic Recovery Payment in 2010. So if you receive Social Security and are working, the maximum you’d get from the Making Work Pay Credit is $150 ($400 minus $250).

In addition to the reduction based on other benefits, there is an earned income limit as well. If you are a single filer making more than $75,000 (modified adjusted gross income), your benefit is reduced by 2% of the amount over $75,000. The married filing jointly limit is $150,000. So if you’re single and earned $80,000, your Making Work Pay Credit is reduced by $100. The credit is fully phased out if you earned more than $95,000 for single filers and $190,000 for married filing jointly.

There are a few other rules for the Making Work Pay Credit – you need to be a US citizen or resident alien with a valid Social Security number and you cannot be claimed as a dependent. If you’re a college student and you are claimed by your parents, you will need to make some adjustments.

Finally, remember that you’ve already received the credit in your paycheck each month. If a tax preparer starts telling you that you are getting a bigger refund because of the credit or they are trying to get you to sign up for a refund loan – walk away. You’ve already received the credit and nothing changes because you’ve filed, it’s just a marketing tactic.

Claiming The Credit

You claim the Making Work Pay Credit on Schedule M, specifically created to help you claim this credit. The Schedule M form is pretty straightforward and TurboTax makes entering the required information easy. Even though you have already received the money in the form of reduced payroll tax withholding, it’s important that you fill out this schedule to determine if you received the full benefit of the credit through paycheck withholdings and to determine if you have a refund or balance due.  Filing Schedule M also requires you to enter your Economic Recovery Payment received, which reduces the Making Work Pay Credit by $250.  The IRS has record of these payments and if this information is not entered correctly, your tax return will not match IRS records.  If this occurs, electronically filed taxes may be  rejected and paper filed returns may be corrected by the IRS.

For 2011, which would apply to your 2010 (next year’s) tax return, the Making Work Pay Credit was phased out and replaced with the 2% payroll tax holiday. This new payroll tax holiday reduces Social Security contributions by 2 percent, which can be as much as $2,136 if you make more than $106,800.

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.