Making Work Pay Credit: Tax Credit Results in Reduced Federal Income Tax Withholding

Are you feeling stimulated? Well, you should be. I was updating Quicken over the weekend when I noticed that the reduced federal income tax withholding schedules have kicked in. In case you haven’t heard, that’s how the “Making Work Pay” tax credit is being handed out.

According to an IRS press release:

“Available for tax years 2009 and 2010, the Making Work Pay credit is 6.2 percent of a taxpayer’s earned income with a maximum credit of $800 for a married couple filing a joint return and $400 for other taxpayers, but it is phased out for higher income taxpayers. Most workers will qualify for the maximum credit. Because the credit is refundable (people can get it even if they owe no tax), most low-income workers will also qualify for the full credit.

Though all eligible taxpayers will need to claim the credit when they file their 2009 income tax return next year, the benefit will generally be spread out over the paychecks they receive beginning this spring and continue until the end of the year.

Many higher-income taxpayers will see little or no change in their take-home pay. That’s because the Making Work Pay credit is phased out for a married couple filing a joint return whose modified adjusted gross income (AGI) is between $150, 000 and $190, 000 and other taxpayers whose modified AGI is between $75, 000 and $95, 000.”

No, reduced withholding isn’t as exciting as a second stimulus check, but it has a similar effect. In my case, I get paid monthly, and my federal withholding dropped by $80/check.

Have any of you else noticed a bit more take home pay?

14 Responses to “Making Work Pay Credit: Tax Credit Results in Reduced Federal Income Tax Withholding”

  1. Anonymous

    I think that this it’s a very readable concept and I agree with you. This post has really enriched my science and experience, I’m happy. I found this site and I can share with you my observations and thoughts. If you have new solutions or ideas, please send me a information by email.

  2. Anonymous

    But shouldn’t everybody adjust their payroll tax withholding so that they are paying the appropriate tax?

    Almost no one I know adjusts their withholding on their paychecks. Given the deductions and exemptions that many tax filers can take, the standard amount taken out of one’s paycheck is more than the actual tax liability.

    People receive refunds year after year because too much is withheld. Once an asst mgr where I work said, “Uncle Sam has been good to me” and I thought that really he was being good to Uncle Sam. The gov’t was able to use his money for 0% interest.

    The ideal is to get back nothing in taxes and owe little to nothing in taxes at the end of the year.

    Even if you use your “refund” to fund your retirement accounts, you lost time of compounding returns by waiting to invest. Readjust your withholding, and put that money in savings that way. Maximize your wealth, don’t share it for free.

    Anyhow, I’ll just readjust how much I’ll believe I’ll owe, claim 6 exemptions on my W4 and just give the IRS a flat amount each paycheck to break even at the end of the year. So for this year, remember to deduct an additional $400-800 off if you go this route.

    For many people this should help them to reduce their 0% loans to the government.

  3. Anonymous

    I understand that if you don’t receive your full credit through withholding reductions that you can claim the difference as a credit when you file your income tax return. Is there going to be a special box on my W-2 showing exactly how much of the credit I DID receive? I certainly don’t want to get short-changed!

  4. Anonymous

    “A bit”? More like “bitsy.” My net increased by $27, not quite enough to buy a bag of groceries.

    Whatever extra, even twenty-seven bucks, is going into savings to pad the emergency fund against the December 28 layoff day. Me, I’d feel a lot more stimulated by the promise of, oh…say, a job.

  5. Anonymous

    I think the entire thing is ridiculous, but whatever… It’s about 400.00 dollars for me and another 400.00 dollars for my fiancee. We are just tossing it in the bank for now.

    I could see this back-firing big time though. I understand that people didn’t use the first round of stimulus the way the government intended, but at least everyone saw it for what it was – a one time thing. Dividing it up over the year via pay check could have an adverse effect. People will get use to it being there, they will incorporate it into their daily spending, they will start depending on it, and they will be screwed when it goes away.

    I’m sure that our state and local representatives are currently working out ways to “help” us spend that money too. They know everyone has a little extra jingle in their pockets now – You can bet your rear-end that tax and service fee increases are right around the corner and those increases (unlike this credit) will be permanent.

  6. Anonymous

    Will Crowthers, I think the IDEA is to have people use it on discretionary spending. Last year people put the extra money towards debt/savings, and it didn’t stimulate the economy like the gov’t wanted. This time, they’ll sneak it in a bit at a time and hope you don’t notice and spend it.

    We may not like it, but it will do what they want it to.

  7. Anonymous

    My fellow grad students and I were trying to figure out why our percentages were so high for an in-school month … yesterday I realized it was probably this tax credit thing. I’m going to verify with HR tomorrow.

  8. Anonymous

    I personally haven’t seen a change in my paycheck and I’m still baffled that we are going forward with this type of ‘stimulus’. Did we not learn the lesson last year that this has little to no effect on people’s lives. Although $800 may seem like a decent chunk of change to some folks, reports show 2 things happening:

    1. They use it on discretionary spending – vacations, luxury items, etc.

    2. If they do use it towards bills, it doesn’t even effect their standing with the amount of debt they generally have (or perhaps high mortgage payment they can’t make).

    I think this program is a pure waste of tax-dollars money. I’m not going to go through the steps of showing that this money was never their money in the first place, but I’ll let the following post do so: http://www.twentysomethingsense.com/2009/02/federal-income-tax-distribution.html

    Shocking isn’t it? Are we really headed towards more re-distribution of wealth!?

  9. Anonymous

    my check went up about $18 for 2 weeks. So I immediately increased the automatic deduction into my savings account by that same $18.

    Now I don’t notice any difference, but I’m saving more.

  10. Anonymous

    Ours is around $60 bucks a month. Although, I feel like just handing it to my 12-month old daughter, as she’s the one who will have to pay it back!

  11. Anonymous

    What worries me is that we will enjoy less withholding now, and pay for it in the near future with higher taxes . . . they can giveth and then taketh away . . .

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