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Are you eligible for the Making Work Pay tax credit and Schedule M?

Making Work Pay tax credit explainedThe highly touted Making Work Pay tax credit is proving to be a headache for many taxpayers this season. Despite a PR campaign by the IRS designed to provide information about the credit, taxpayers are still struggling to understand who is eligible for the credit and how it affects their 2009 federal income tax return and if they need to file a schedule M (and when to file it if they forgot). Following are answers to some of the most popular questions about the Making Work Pay credit:

Who is eligible to claim the credit?

The Making Work Pay credit is intended to provide tax relief for working and middle class families. This means most taxpayers will be eligible for the credit, but there are some exceptions:
  • If you did not work during the year, you do not qualify for the Making Work Pay credit. You do not have to work full time for the year, but you must have income from wages, salary, or self-employment during the year.
  • Married taxpayers filing jointly who earned more than $190,000 and individual taxpayers who earned more than $95,000 in 2009 may not claim the Making Work Pay credit.
  • If you are claimed as a dependent on another taxpayer's return, you do not qualify for the Making Work Pay credit.
  • If you are a nonresident, you do not qualify for the Making Work Pay credit.
  • Pensioners, retired persons, and the disabled do not qualify for the Making Work Pay credit unless they also received earned income during the year. Those who qualify, however, should have received an Economic Recovery Payment in the amount of $250 in 2009. For more information on this payment, see our prior post.
Self-employed individuals may claim the Making Work Pay credit if they are otherwise eligible, despite not having any withholding adjustments during the year.

How much is the credit?

The maximum allowable credit is $400 for working individuals and up to $800 for married taxpayers filing joint returns. The credit is figured at a rate of 6.2% of earned income. It will phase out for individual taxpayers with modified adjusted gross income over $75,000 or $150,000 for married couples filing jointly; the phase out is at 2%, which means taxpayers who earn more than those limits will still qualify for the credit but will not receive the full amount.

Since I already had money taken out of my paycheck, does that mean I can't claim the credit?

No. If you were paid a wage or salary by an employer, you saw a little more in your paycheck over the year because of the adjusted withholding tables. This means less money was withheld from your check. You did not actually receive any credit during the year.

A credit is a dollar-for-dollar reduction in your tax bill. When you calculate your tentative tax due, credits are applied to that tentative tax and reduce your overall tax bill. You can think of credits as an additional "payment" toward your tax due. So, in this case, a $400 Making Work Pay credit will reduce your tax bill by $400.

It's not a windfall, however. The purpose of the credit is to offset the reduced federal withholding you paid in over the year with the adjusted tables. If you qualify for the full Making Work Pay credit (and most taxpayers should qualify), you should end up with no difference at the end of the tax year. The tax rates did not change -- you just paid in less.

If your employer did not make any adjustment to your withholding -- or if you chose to make an adjustment to withhold more -- you should receive a refund. This would reflect the idea that you paid in more during the year, and thus, had less in your pocket during the year.

If you didn't qualify for the credit, but your withholding was adjusted anyway, you'll have to make up the difference when you file your taxes. This is because you paid in less during the year but cannot rely on the credit to offset the lesser withholding.

I'm self-employed or didn't have any withholding during the year. Does that mean I don't qualify for the credit?

No. If you're self-employed and didn't have any withholding during the year, you're still entitled to the credit if you otherwise qualify. You just aren't offsetting any withholding. So long as you qualify, you'll get the entire amount of the credit to apply toward your tax due. Just complete a Schedule M (see below).

How do I claim the credit?

The amount of the credit will be figured on your 2009 income tax return. You'll claim or report the credit on line 63 of your federal form 1040. To figure the amount on that line, you need to complete a Schedule M, even if your withholding was adjusted by your employer or if you are self-employed. If you don't file a Schedule M, you won't receive the credit. Filing the Schedule M is not complicated. You can click here for more information about how to complete a Schedule M.

If, however, you file a form 1040-EZ, you'll enter the credit on line 8. You'll find the worksheet for the credit on the back of the form -- there's no need to file a Schedule M.

Am I am eligible for the credit if I also received the Economic Recovery Payment?

Yes. If you otherwise qualify, you are eligible for the Making Work Pay credit even if you receive the Economic Recovery Payment ($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran's benefits) or Special Credit for Certain Government Retirees ($250 per eligible federal or state retiree). However, you must reduce the amount of your Making Work Pay credit by any amount received under those programs. Figure the adjustment on Schedule M -- you have to file the Schedule M to get the credit. If you received the Economic Recovery Payment, but do not report it on your return, it will slow your refund.

What happens if I owe money because of too little withholding?

If you owe tax because too little was taken out of your paycheck during 2009, you may qualify for special relief if the result is a penalty. The IRS will waive an estimated tax penalty that applies if it relates to the Making Work Pay credit. If you receive an estimated tax penalty notice from the IRS, you can request a waiver using form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

What if I've already filed my tax return and I forgot to file a Schedule M?

Your first instinct is probably to rush right out and file an amended tax return - but don't. Filing an amended tax return will just confuse the issue and slow down your refund. If you have already filed your tax return and forgot to file the Schedule M or claim the credit, don't panic: you're not alone. Millions of taxpayers have apparently done the same thing. The IRS is aware of this problem and they are fixing the issue for taxpayers. So, if you qualify for the credit and you've already filed your return, you don't need to do anything. The IRS should figure the credit for you and adjust your refund (or tax bill) accordingly.

This story was updated on April 14, 2010 to include further information about filing a Schedule M.

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