Make Withholding Changes Work for You

In April 2009, the Making Work Pay tax credit gave all wage earners a small increase in their paychecks by way of reduced federal withholding. Now it’s time to look at how the credit will affect your 2010 tax return.

Most Americans received exactly the amount of credit they were entitled to. But the amount some taxpayers received was too large. Since they got the credit through reduced federal withholding, this may have resulted in a slight underpayment of tax. The Treasury Department estimates this could lead to more than 15 million people owing additional taxes, and having to pay more when they file their returns.

To find out if you may be one of those individuals, take a few minutes now to look at your 2010 pay stubs. It’s easy to figure out if you received too large a credit and easier still to make adjustments. But you had better act quickly, before the year ends.

To determine whether your credit may have been too large, let’s first review the ground rules.

The maximum credit is $400 for single filers and $800 for married couples filing jointly. To receive the full credit, individual filers must make $75,000 or less; couples must make $150,000 or less. Partial credits are available on incomes up to $95,000 and $190,000, respectively.

Both wage earners and the self-employed are eligible to receive the credit. If you are a wage earner, you got the credit automatically through adjustments your employer made to your paycheck.

If you are self-employed and not subject to withholding, you will be able to claim the entire credit on your 2010 tax return.

All taxpayers will need to report the full credit on their 2010 tax return—even if it was deducted automatically through adjustments to their withholding. This will ensure that all taxpayers receive the right amount—no more and no less.

If you worked one job, aren’t eligible to be claimed as another taxpayer’s dependent and have no other income, then you probably received the right amount of credit. But you may have received an excess credit if you have two or more jobs, if you’re married and both you and your spouse work or if you’re a full-time employee but have a moonlighting business that pushes your income above the maximum limit.

It’s easy to see how an individual with two jobs could receive too large a credit.

Say you work 40 hours a week at one job and 20 hours at another and you qualify for the maximum $400 credit. If you’re single and receive a total credit of $500 from your two jobs, then you’ll probably owe the IRS an additional $100 come April 15.

Here are examples of other filers who may be affected:

• Pensioners. Non-government pension income is not eligible for the credit. If you receive earned income, you may qualify, depending on how much you earned.
• Dependents. If someone else declares you as a dependent on their tax return, you don’t qualify for any credit, even if you work.

Say you are in one of these categories. How do you find out how the credit is affecting your federal withholding, and if the withholding is adequate to cover your income tax liability?

It’s easy with the user-friendly tools available at irs.gov. You can perform a quick check using the IRS withholding calculator. Enter information about yourself and in a few clicks you get a result that indicates whether you need to adjust your withholding.

If you need help with the calculator, the IRS provides a how-to-video. And, if you prefer the good old-fashioned printed page you can download a copy of Publication 919: How Do I Adjust my Tax Withholding?

If the calculator shows that your federal withholding is too low, then you should submit a revised W-4 to your employer as soon as possible for 2010.  If it looks like you will be one of the millions of people who will owe money for 2010, at least you can try to make an adjustment before the end of the year.

For more information on the Making Work Pay tax credit and to check your withholding, visit the Making Work Pay tax credit page on the IRS website.