Last Updated: May 11, 2009
You wouldn't be alone if you didn't understand all the provisions of the American Recovery and Reinvestment Act, especially the one that affects your pay check, the one that makes it seem like your taking home more money each pay period.
In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.
This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.
If you receive a paycheck and are subject to withholding, the credit will typically be handled by your employer through automated withholding changes in early spring. According to the IRS, these changes may result in an increase in take-home pay and the amount of credit will be computed on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.
So what does this mean to you?
Perhaps, nothing. But as with many things financial, tax law changes represent the perfect time to check in with a financial planner to have your situation reviewed. Find a Financial Planner. "I believe this warrants all taxpayers taking a closer look at their federal withholding," said FPA member, John Kilroy, CPA, CFP®. "No one should assume their withholding is in line with what ultimately may be due at tax filing time. I believe this to be true in any year, but even more so now as this "credit" influences amounts withheld. My advice: Anyone who receives a paycheck should work with a tax professional (now - if not sooner) to project whether he or she may be over or under withheld. The worst thing that may happen is for a taxpayer to learn they are not eligible for the Making Work Pay Credit after it has been given to them in their paycheck."
According to the IRS, "it is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or a married couple whose combined income places it in a higher tax bracket should consult the IRS Withholding Calculator and, if necessary, submit a revised Form W-4, Employee's Withholding Allowance Certificate, to ensure enough tax is withheld. Publication 919, How Do I Adjust My Tax Withholding?, provides additional guidance for tax withholding including a special Making Work Pay worksheet. Learn more about the Making Work Pay tax credit
Financial planners and financial planning firms also offered these tips:
"The result of the change is that many employees will have their withholding reduced automatically in anticipation of the ARRA tax credit," said FPA member, Gary Kinghorn, director of product management at AdviceAmerica. "The best case scenario is that employees should be seeing larger take-home pay, and the same tax obligation next year."
Kinghorn also said, "employers, who are responsible for determining the changes in withholding, have general guidelines as to the new withholding schedules, but if the employee is not eligible for the ARRA tax credit (because they are be working two jobs or their spouse makes too much), the result could be an under withholding. Employees don't need to file a new W-4 form to get the reduced reduction, but they should consider reviewing the specifics of the tax credit (or consult their local financial planner and CPA) if there's a chance they aren't eligible. If that's the case, they should file a new W-4, increasing withholding, if they wish to more closely manage their withholding to their actual tax obligation."
Others agree. "Yes, consumers should review and possibly change their withholding," according to First Command Financial Planning. You should review your previous and currrent pay stubs and determine the difference in withholding. You can either use the IRS withholding tables found in IRS Circular 15-T or request an additional amount be withheld on their Form W4.