What is the Making Work Pay Credit?

Tax Tips

The Making Work Pay tax Credit was a fully refundable tax credit built into President Obama’s stimulus package for 2009 and 2010. The Making Work Pay Credit was actually “earned” by you in the form of lower tax withholding through your employer throughout last year. In other words, even though the credit is computed on your tax return, the savings were seen in higher take home pay instead of a bigger tax refund. While the mechanics of the credit can be confusing, you can rest assured that TurboTax asks you the proper questions and then calculates the maximum credit based on your responses.

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.