By Jennifer L Wilson

In February of 2009, the IRS released new withholding tables to incorporate the “Making Work Pay” credit.  This credit is part of the American Recovery and Reinvestment Act of 2009.  Many people have heard of the tax credit and that it offers an increase in take-home pay to millions of taxpayers.  There are a few important things concerning the credit that these taxpayers may not be aware of. 

Many taxpayers will be eligible for this credit and will need to claim the credit when they file their 2009 and 2010 tax returns.  However, the IRS has updated the withholding tax tables so that these taxpayers, who work and are subject to withholding, will receive the credit throughout the remainder of the year – in their paychecks – rather than waiting to receive the money at tax time next year.  Less will be withheld in Federal taxes, which means greater take-home pay.  Workers that are eligible do not have to fill out an updated Form W-4 in order for the change in their paychecks to take place.  Employers and payroll service providers will automatically make the changes to the paychecks of eligible individuals, as instructed by the IRS.     

Most taxpayers are happy to receive the automatic help, but some need to examine their personal situation a little closer before deciding not to update their W-4.  Certain taxpayers could find themselves in an under-withheld situation at the end of 2009. 

There will be a maximum credit of $800 to married taxpayers filing a joint return, a maximum credit of $400 for other taxpayers, and the credit will be phased out for higher income taxpayers.   If you are married filing joint, the new withholding tables may provide both you and your spouse with $600 each (or slightly more if the new tax tables are put to use prior to April 1) in additional take home pay.  That could be a total of $1,200 (or more). However, when you file your tax return, the credit will be capped out at $800.  That could put you in the position of being under-withheld by $400 or more. 

Another situation that may cause under-withholding is the case of married filing joint taxpayers who are affected by the phase out.  Separately, the spouses may make less than the phase out amount and have a reduction in withholding, while jointly they may not be eligible.  For instance, if each of you makes $100,000 per year, you will each see a decrease in withholding from your paycheck.  However, you will not be able to claim the credit on your tax return because jointly, your income was $200,000, which is greater than the phase out amounts.      

Individual taxpayers who are working in more than one job at the same time may be affected as well.  When you file your tax return, your credit will cap out at $400.  You may have a reduction in withholding of up to $400 in each job, which could mean a total reduction of $800 or more.  In this case, you could also be under-withheld at year end.

Taxpayers that will be claimed as a dependant on someone else’s tax return are not eligible for the credit.   However taxpayers don’t necessarily provide that information to their employer.  If your withholding is decreased, you may want to increase it, because you will not be eligible for the credit at year end.    

Taxpayers who think they will be affected by any of these situations should consider increasing their withholding by submitting a new W-4 to their employer.  Everyone’s situation is different.  Just because someone falls in this category does not necessarily mean that they will owe money with their 2009 tax return if they don’t increase their withholding.  If a taxpayer is unsure of what to do, they should consult with their tax preparer to obtain advice on whether or not they should increase their withholding.  For guidance on adjusting your withholding, see IRS Publication 919 which can be found at http://www.irs.gov/.  More more information regarding the specifics of the credit, Click Here.