How the Making Work Pay Tax Credit Lowers Taxes

The 2009-2010 Making Work Pay tax credit can reduce tax due and increase a tax refund by up to $400.00, and $800 if married and filing taxes jointly. The tax credit is available to different tax filers at differing income level caps; tax filers with Adjusted Gross Incomes (AGIs) below $75,000, and tax filers who are married filing jointly with an AGI below $150,000 may qualify for the Making Work Pay tax credit in full.

The credit phases out at a 2% rate of income over the $75K and $150K caps, and is eventually eliminated with an added $20K and $40K respectively. To illustrate the phase out, 2% of $20,000 is $400 which is the maximum Making Work Pay tax credit a single tax filer can receive.
How to qualify for the Making Work Pay Tax Credit:

The Making Work Pay tax credit is a tax credit available to income earning tax payers for the tax years 2009 and 2010. This credit is recorded on line 63 of the 2009 IRS Form 1040 and line 40 of the IRS 2009 1040A. To qualify for the Making Work Pay tax credit in full requires the following criteria to be met. Otherwise the credit is either reduced, one is ineligible to claim it, or an alternative tax credit is claimed i.e. the Government Retiree tax credit also claimed using Schedule M.

• Adjusted Gross Income (AGI) below $75,000 if not married filing jointly
• AGI below $150,000 if married filing jointly
• Non-receipt of Recovery Rebate Credit of $250-$500
• Non-receipt of Government pension payments of $250-$500
• Income from employment or self-employment

According to the U.S. Internal Revenue Service, some employers may have reduced income withholdings from employee paychecks. This can be determined by inquiring with an employer human resources department. Either way, the Making Work Pay tax credit may be claimed, however if employee withholdings were/are reduced in 2009 or 2010. this may mean the tax credit could only reduce the amount of tax owed rather than increase the amount of tax refunded.

To further illustrate how the credit works, if tax withholding is reduced  by $400.00 for the tax year on a $40,000 AGI, that $400.00 will still be owed when filing taxes all other factors held constant. If the Making Work Pay tax credit is not claimed in this scenario, the benefits of the credit are not realized because taxes will paid without the credit.

IRS Forms used to claim the Making Work Pay credit

To claim the Make Work Pay tax credit an IRS Schedule M will need to be completed and sent to the IRS. If you claim the Make Work Pay tax credit and are filing taxes online, make sure the online tax filing service has this form available before filing taxes with that service to avoid complications. Schedule M and other required forms for filing the Make Work Pay tax credit are listed below:

• 2009 IRS Form 1040 :A different form 1040 may be required

Making Work Pay Tax credit tips

The Making Work Pay tax credit is a limited time tax credit. The tax credit expires at the end of tax year 2010. This credit can benefit income earners with potentially lower taxable income or increased tax refund. In a sense this can be perceived as a tax subsidy to U.S. tax payers. For additional information on the Making Work Pay tax credit the following IRS website pages me be of assistance.

•  The following IRS website pages about the Making Work Pay tax credit provide additional information on the tax credit which may be helpful in understanding and claiming it.

Making  Work Pay Five facts about the making work pay tax credit (IRS)

•  It is important to claim the Making Work Pay tax credit if you are eligible. Otherwise, if your employer reduced withholdings and the credit is not claimed, you may end up paying too much tax.

• For those who can receive a refund from claiming the Making Work Pay tax credit, a reduced refund may be received from not claiming the tax credit.

• Line 13 of Schedule M subtracts Recovery Rebate Credit from the Making Work Pay tax credit

• Schedule M phases out qualification for the Making Work Pay tax credit by multiplying income in excess of the cap by 2% then subtracting the result from the credit qualified for. Ex: 2% of $10,000 additional income=$200 $400-$200=$200.

• Total phase out of the Making Work Pay Tax Credit beings at $95,000 for tax filers who qualify for the whole credit are not married filing jointly, and $190,000 for tax filers who qualify for the full credit and are married filing jointly.

Source: http://www.irs.gov (U.S. Internal Revenue Service)

A Guide to Tax Withholding Forms

Tax withholding forms are documents issued by the U.S. Department of the Treasury's Internal Revenue Service and Individual State governments for the purpose of generating Federal and State income. Similar entities and organizations exist outside of the United States for the same reason(s).

In the case of employers, withholding documents are required by law to be given to employees to complete for the purpose of withholding income for the generation of government tax revenue. This article will outline the forms used by the IRS and State governments for withholding income taxes.

The W series of tax withholding forms

The W series of tax withholding forms are forms given to employers for withholdings on income for the purposes of taxation, pension, advanced payment, voluntary payment and alternate source of payment not usually withheld These types of forms are available through the IRS and can be filed electronically or financial service provider. Instructions for these forms can be found in the IRS Employer's Supplemental Guide i.e. Publication 15-A.

• W-4: The most common W form is the W-4 that pertains to how much of an employees income will be withheld based on exemptions and other criteria. When the fiscal year ends, the total of the withholdings is added and the information is sent to both the employee and the IRS via a W-2. To change the amount of withholdings, consulting a Human resources manager and/or IRS publication 919 may be helpful in submitting a new W-4.

• W-4S: The W-4S is the IRS withholding form that allows employees to deduct taxes from sick pay. This may or may not reduce the amount held from regular income and may be beneficial if sick pay has an expiration and does not roll over.

• W-4P: W-4P is the form that is completed when an employer has a pension or retirement plan. Since this money is withheld it may be tax deferred as one's adjusted gross income will decline by the amount of the withheld amount.

• W4-V: Additional withholdings can be given to the government by completing a form W4-V. This type of withholding may be utilized to reduce taxes, or supplement anticipated tax due at the end of the year.

State tax withholding forms

Since tax withholdings also contribute to State government income, separate tax withholding forms are used for States. The State forms are created by each state and therefore one should be aware of the tax withholding form for their State. The following link is a useful source of State tax withholding forms/documentation requirements. State tax withholdings are also reported on form W-2's after the end of the fiscal year. This information is sent to both the Internal Revenue Service and the income tax payer.

Adjusting withholdings to be more or less

In some cases, either too little or too much income tax is being held back from one's paycheck. Determining the ideal amount of withholding is a matter of calculating how much one's estimated tax due will be after the end of the fiscal year and matching tax withholdings with that amount. Income tax withholding can be adjusted by submitting a revised Form W-4 to one's employer. IRS publication 919 is a Federal publication that illustrates and explains the withholding adjustment process, and provides tips and instructions on why an adjustment may be necessary.

Other tax withholding forms

In addition to standard employee income, withholdings are also required for several other types of income including scholarships, grants, pensions, non-resident employee income, income acquired abroad, interest, rental, and dividend income. In some cases, financial institutions may require a form W-9 for identification and reporting purposes.

Additionally, form 1099's are used to report additional income such as interest, capital gains, non-employee, and dividend income to the IRS. If no income is withheld for this income, the form 1099 will make this clear to the IRS and income recipient, at which point it is the responsibility of the income recipient to report and pay due taxes by filing the necessary tax forms such as the form 1040, and schedule C.

Summary

Tax withholding is reported to State and Federal tax authorities in addition to income sent and/or received. Various forms are used to report tax withholdings or the lack thereof to the tax authority. If tax is not withheld and income received is taxable, tax will become due the following fiscal year after receipt of the income.

Of the forms that record income tax withholdings are the W, and 1099 series of IRS tax forms in addition to State tax forms and income recipient filing forms such as State and Federal income tax forms. Several types of income are subject to income withholding and/or taxation. If tax is not withheld from such income, this tax must be reported to the IRS by the income distributor or facilitator, for example, capital gains acquired through a brokerage would be reported by the brokerage using a form 1099.

Sources:
1. http://www.irs.gov/pub/irs-pdf/fw4.pdf
2.http://www.dornc.com/downloads/wh_forms.html
3.http://www.irs.gov/pub/irs-pdf/p15a.pdf
4.http://www.irs.gov/pub/irs-pdf/p919.pdf
5.http://www.taxadmin.org/fta/link/forms.html
6.http://www.irs.gov/pub/irs-pdf/p919.pdf
7.http://www.irs.gov/businesses/small/international/article/0,id=105155,00.html
8. http://www.irs.gov/pub/irs-pdf/f1040sc.pdf