Sunday, February 6, 2011

Don't forget to take the Making Work Pay Credit

In 2009 and 2010, the Making Work Pay Credit has been added to the tax code under the American Recovery and Reinvestment Act (ARRA). It's a refundable credit of 6.2 percent of earned income with a maximum of $400 per individual and up to $800 for married filing joint tax returns.

The credit phases out for taxpayers with modified adjusted gross incomes over $75,000 and $150,000 for married couples filing together.

The credit is not available if:
  • your modified adjusted gross incomes at $95,000 and $150,000 for married couples
  • you do not have a social security number
  • you are a nonresident alien or
  • you are claimed as a dependent on someone else's return.
Most workers received the benefit of the Making Work Pay Credit through larger paychecks, reflecting reduced federal income tax withholding during 2010. Self-employed taxpayers can claim the Making Work Pay credit on their 2010 return.

To take advantage of the making work pay credit and the government retiree credit, complete Schedule M and report the total on Form 1040, line 63. For additional information, review Schedule M instructions.

Please note, there is no $250 economic recovery payment or Government Retiree Credit in 2010. Last year, the Making Work Pay was reduced if the taxpayer received a $250 economic recovery payment if they received social security benefits, SSI benefits, railroad retirement benefits, veterans' disability, or pension benefits.

For 2011, the Making Work Pay Credit is replaced for one year only (2011) with a 2 percentage point reduction in the employee's portion of the payroll tax (OASDI), from 6.2% to 4.2%. The reduction applies to all wage earners regardless of income. The employer's share of the payroll tax is unaffected. For wage earners with payroll in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800). The OASDI portion of the SE tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%.

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