With tax season on the way and the economy in shambles, it's just about time for some good news on the financial front. One of the provisions of the Obama stimulus package more properly known as the American Recovery and Reinvestment Act, the Making Work Pay tax credit is part of an attempt to reduce the tax burden on certain income brackets of America's populace. Making Work is a temporary provision added to tax law designed to phase out after the 2010 tax year. Making Work Pay tax credits are briefly explained below:
The actual effect of the Making Work Pay credit is pretty simple. It's a refundable tax credit for 6.2 percent of your total earned income. A refundable tax credit is a credit that can exceed the cost of your taxes and increase the size of your tax refund, unlike a child tax credit which can't exceed your total taxes for the year. The Making Work Pay credit is capped at $400 dollars for a single payer and $800 for a married couple filing together.
You'll generally qualify for this credit if you make less than $75,000 in adjusted total income in a given year. Joint households will qualify if they make less than twice that, again using adjusted total income. Once you pass that threshold, the credit fades in proportion to how much more you make than the $75,000/$150,000 mark.
There are several other requirements necessary to qualify for the Making Work Pay credit. You must have a social security number and have earned income over the course of the year, so those on unemployment don't qualify. Additionally, if you are claimed as a dependent by someone you don't qualify for the credit, even if you're working. This includes college students still claimed by their parents as dependents. Those working multiple jobs or receiving social security are also not eligible for the Making Work Pay credit.
If your taxes are filed through your employer, they may have already adjusted for the tax credit, so you should check your W-2s carefully in order to make sure you haven't underreported your income taxes for the year. Any job where your income and other taxes are automatically withheld can potentially have cause the underreporting. The opposite applies to those who file their own taxes through self-employment and the like: check your forms to make sure that you're taking the Making Work Pay credit into account.
If you've received other stimulus aid (like the $6500 Tax Credit for Homebuyers) over the course of the year you may not be eligible for the Making Work Pay credit. The Making Work Pay credit also won't include any income not counted as taxable income, which can include some retirement benefits or combat pay for those in the military. Check carefully as you don't want to make a mistake when you are filing your tax return that could cause an audit or require you to pay back taxes.
The Making Work Pay credit was designed to help the tax burden on middle class families in order to pump up consumer spending. The hope was that the lessened amount of taxes they faced would translate into an economic boost that could help the country bounce back from the last several years of trouble. Hopefully the stimulus will work.
