Federal Income Tax – Making Work Pay Credit
In 2009 Congress passed the “Making Work Pay Tax Credit”. This is a credit available in tax years 2009 and 2010 to taxpayers with earned income (income from jobs or from self-employment). The credit is calculated at the rate of 6.2% of earned income, until the credit reaches $400 for single taxpayers, or $800 for joint returns. The credit phases out for single taxpayers having adjusted gross income above $75,000, and joint filers with incomes above $150,000. The credit is not available to persons claimed as dependents on someone else’s income tax return, nor to non-resident aliens. The taxpayer must submit a Social Security number (not a taxpayer identification number) to claim the credit.
The 6.2% tax credit rate is exactly the rate of the employee’s portion of Social Security Tax. The $400 credit for an individual is equivalent to the employee’s share of Social Security tax on earned income of $6,450; the $800 credit allowed on joint returns is equivalent to the employee’s share of Social Security tax on $12,900. The modest amount of the credit and the relatively low “phase out” indicate that Congress was addressing the burden payroll taxes impose on low wage taxpayers.
The Making Work Pay Tax Credit was part of the American Recovery and Reinvestment Act of 2009, a part of the early 2009 stimulus package.
To get immediate buying power into the hands of consumers, Congress provided a $250 Economic Recovery Payment in early 2009 to every Social Security beneficiary (and other retirees on federal pensions) and reduced withholding from wages by amounts that hopefully approximated the tax credit. Congress was so anxious to get buying power into the hands of consumers that it reduced the withholding tax rate on pensions, even though pensions don’t qualify for the credit.
The final reckoning comparing the credit (and other tax computations) with the withheld tax occurs on the 2009 federal income tax return. Taxpayers who received the $250 Economic Recovery Payment must reduce their Making Work Pay Tax Credit by that amount.
References:
Internal Revenue Code:
Section 36A, Making Work Pay Credit
IRS Publication:
No. 4787, Catch a Break – Individual
