2009 Making Work Pay Credit

This year, Congress passed the American Recovery and Reinvestment Act. In real people’s terms, it’s the stimulus bill. Well, what’s in it for you?

If you think back to previous stimulus packages, the key to the package was a rebate check that you received in the mail. You will also receive a rebate this year, but it’s a bit different than in the past.

It’s called the Making Work Pay Credit, and it’s a credit of up to $400 for a single person and $800 for a married couple (or 6.2% of your earned income, if that amount is lower than $400 or $800). The credit phases out (meaning you are not eligible for the full amount) with a modified adjusted gross income of $75,000 for a single person and $150,000 for a married couple. Full phaseout (meaning you will no longer eligible for the credit) occurs at $95,000 for an individual and $190,000 for a couple.

However, this time, instead of a rebate check in the mail, you will receive your rebate each paycheck for the rest of year by the employer reducing the amount of income tax withheld in each check. Sounds great, right? You get a little bit extra in each paycheck and we avoid the huge fees to mail out the checks.

But…workers need to be careful that the correct amount for the rebate is really being given to them. Individuals with multiple jobs as well as dual income married couples need to make sure that they are not too little withheld from their paycheck. Each employer cannot account for the other income that an individual/family receives.

So, in the case of an individual with multiple jobs, he may received $400 back from each of his employers. When he goes to file his taxes next year, he’ll still owe the $400 in taxes (or have a $400 less refund).

The same applies for a dual-income couple. It appears that the employer withholding tables give back about $600 for a person filing married on is W4. So, if you have 2 married individuals getting back $600 over the course of the year, you will receive $400 too much.

How can you avoid owing taxes next year?

If you are in one of the situations I outlined above, you can adjust your W4 by recalculating your exemptions or you can simply figure out how much overage you are receiving and ask for that amount to be added to your withholding. Don’t forget to change it back at the beginning of next year, though.

How do you plan to use your extra money each month? Do you plan to spend it, use it for debt repayment or save it? For more frugal ideas, visit Being Frugal.