In 2009, the American Recovery & Reinvestment Plan stimulus package included the Making Work Pay Tax Credit, which provides a refundable tax credit during 2009 and 2010. Most wage earners will receive their tax credit in the form of a reduction of federal income tax withheld from their paychecks. For those individuals receiving social security benefits, veteran’s benefits, railroad retirement, Supplemental Security Income, and some federal government retirement benefits, they will receive a payment of $250.
The stimulus stipulates:
- Wage earners get a tax credit of 6.2% of their earned income, up to $400 for individuals and $800 for married filing joint taxpayers.
- Nonresident aliens and persons claimed as a dependent are not eligible.
- There is a phase out of the credit at 2% of income over $150,000 for married filing joint taxpayers and $75,000 for single taxpayers.
- The credit is eliminated for couples earning more than $190,000 and singles earning more than $95,000.
- The credit is reduced by any other payments associated with the stimulus package, such as, the $250 payment for the individuals receiving social security benefits.
The tax withholding tables were adjusted in February 2009 to reflect the reduction of federal income tax in the hopes of getting the stimulus money in the hands of the taxpayers and thus circulating in our economy.
In doing so there is an underlying issue of potentially underpaying federal income taxes.
Anyone who has a pension with federal income tax withheld based on the tax tables would now have a reduced amount of withholding taxes. Recognizing a problem, the February 2009 withholding tables were revised in April 2009. To further confuse this issue, the IRS released special tables for the pension plans to restore the withholding to the original amounts. The shortfall results will vary based on how long the pension plan used the reduced tax table. Everyone should review their withholding so adjustments can be made for the remainder of the year, if necessary.
Wage earner taxpayers are presented with a different set of issues. If you are single and have more than one job, the reduction in withholding will affect both incomes. This may double your withholding reduction compared to the eligible tax credit amount of $400. A similar problem can occur with married couples who might both receive a withholding reduction. This will double the reduction amount compared to the eligible tax credit of $800 for married couples. The couple could potentially have a balance due of federal income tax for $800 or their refund might be reduced by $800. If a couple’s combined income is in the phaseout area and they are not eligible for the tax credit, the couple will want to increase their withholding rather than continuing to have a reduction in withholding taxes.
Anyone with an underpayment of income taxes can potentially owe underpayment penalties and interest on the amount of underpaid tax. Tax planning is the wisest course of action. Consult with your tax adviser regarding how the withholding reduction might affect you. Should you have questions about your individual tax situation, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
