New Credit to Increase Your Take-Home Pay

The Making Work Pay Credit will reduce your 2009 tax bill—the one that’s due April 15, 2010—by 6.2 percent of your earnings, up to a maximum reduction of $400 for singles or $800 for couples.

Unlike last year’s tax stimulus payments or rebates—which were delivered through direct deposit to bank accounts or checks in the mail—workers will get the benefit of this year’s tax cut through slightly higher paychecks for the rest of the year. Most singles will enjoy an extra $45 a month in take-home pay and most married workers will get an additional $65 a month in their paychecks.

The IRS has revised the tax withholding tables and employers are scrambling to build the new numbers into their payroll systems. Once that’s accomplished, workers will automatically receive higher take-home pay. You don’t have to do anything to get your money.

Some lucky workers will see extra cash beginning in March, and almost everyone else will by April.

We say “almost” everyone because the credit is phased out at higher income levels. You don’t get the credit if your 2009 Adjusted Gross Income (that’s basically taxable income before subtracting exemptions for yourself and your dependents, and before subtracting your standard or itemized deductions) is more than $95,000 on a single return, or more than $190,000 on a joint return.

The size of the credit is gradually reduced as income rises between $75,000 and $95,000 on single returns, and between $170,000 and $190,000 on joint returns.

When you file your tax return in 2010, you’ll claim a credit worth up to a maximum of $400 for singles or $800 for married workers. The credit will cut what you otherwise owe in taxes dollar for dollar, bringing your tax bill down in line with the reduced withholding taken from your paychecks.

Although the $800 credit for married workers is twice the size of the credit for single people, they won’t enjoy double the increase in take-home pay. Here’s why: The government decided to cram the full $400 credit amount for single workers into reduced withholding during the last nine months of the year – giving them about $45 a month.

But married workers are treated differently. Rather than receive the full $800 credit during the rest of this year, they will see their withholding cut by just $600—or about $65 a month. They’ll get the other $200 when they file their returns next year.

Now, if both you and your spouse work—or if you work more than one job— you’ll enjoy a boost in take-home pay from each employer. If a couples’ combined withholding drops by more than $800 during the year, the reduction will be more than the value of the credit they claim when filing their taxes in 2010. That will result in a smaller refund or a bigger tax bill on their 2009 return.

It was concern that married couples might end up with too much withholding that led the government to restrict the benefit for married couples to $600 for the rest of 2009. If you’re concerned that too little will be withheld from your checks, you can file a new W-4 form with your employer so that additional tax will be withheld from your checks.

Because self-employed people aren’t subject to tax withholding, there’s no way to pump up their paychecks by reducing their withholding.

But if you’re self-employed, you’re not out of luck. You can reduce your quarterly estimated tax payments (the first one is due April 15) by $100 each quarter if you’re single or $200 each quarter if you’re married. You do that when you file your 1040-ES forms during the year. Claiming your tax credit in 2010 will bring your tax bill down in line with your reduced payments.

The new law includes a $250 tax cut for retirees. The money will go to recipients of Social Security and Railroad Retirement benefits, Supplemental Security Income and veterans pensions. Federal retirees who don’t receive Social Security will also get $250. If you’re married and file a joint return and both husband and wife qualify, you’ll get $500.

What if one spouse is retired and the other still working? The worker will enjoy up to $65 a month in reduced withholding, the retiree will get the $250 payment, and the couple will claim a $550 credit when they file their 2009 tax return. (The law says the basic $800 credit for married couples has to be reduced by the $250 payment for retirees.)

When will these retiree payments arrive? They will likely go out starting in May, by electronic deposit to those who get their benefits direct-deposited, and by checks to the rest. The law says they must be made by June 17.