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2 ways to collect New tables then what Midyear start full-year benefit Some limits No paycheck no problem AMT also covered More credit for your children Breaks for lower-income workers Two ways to collect
You can collect the credit either by having the amount show up in your paychecks or by claiming it as a lump sum on the 2009 tax return that you’ll file in 2010. “If you draw a paycheck and have wage withholding, then certainly the easiest away is to simply sit back and let natural course of things occur,” says Mel Schwartz, a partner in Grant Thornton’s National Tax Office in Washington, D.C. “What I’ve been hearing is that the IRS is encouraging companies to make the changes in payroll,” says Mark Luscombe, principal tax analyst with the Riverwoods, Ill.-based tax publishing company CCH. “Since it gets the money into pockets sooner, most individuals probably will prefer the payroll deductions.” The payroll method also should save some federal dollars. Distribution of rebate checks last year cost the Treasury more than $40 million. New tables then what
The IRS has known that the Making Work Pay credit might be a possibility for months, so the agency had a bit of a head start. Still, employee withholding tables aren’t expected to be fully updated and implemented by companies until June. Stay in touch with your payroll office on what you might need to do. In most cases, that means you won’t have to do anything, although some workers might choose to in order to get even more in each check, effectively speeding up the pace at which they receive Marking Work Pay money. “You’re certainly free to do that,” says Schwartz. “But the IRS is probably going to write the withholding tables assuming you haven’t done that, so you’ll end up with a reduction in withholding greater than the $400 credit. That might not be a bad thing. You’ll have reduced the interest-free loan you’re going to make to the feds.” But underwithholding also could mean you’ll owe more than you expected when you compute your final 2009 tax bill. If your calculations are off too much, Uncle Sam might hit you with an underwithholding penalty, so run the numbers carefully before making any credit-related changes. Midyear start full-year benefit
If the reduced payroll tax amounts are implemented in early June, workers should see around $13 more show up in their pay envelopes through the end of the year. That would provide for the full $400 to be paid out by the end of 2009. This credit also is in effect for 2010. With next year’s payroll credit adjustments beginning in January, workers should get around $7.50 per week more in earnings. Some limits
One thing is the same as with the earlier stimulus payouts: The credit phases out for higher-income workers. The full Making Work Pay credit is available to individuals earning $75,000 or less, or a married working couple making $150,000. Taxpayers won’t be eligible for any credit once their adjusted gross income hits $95,000 if single filers or $190,000 for jointly filing couples. In addition, nonresident aliens and folks who can be claimed as a dependent on another taxpayer’s return are not eligible for the credit. No paycheck no problem
What if you don’t get a paycheck? You still might be eligible for a $250 credit. The new law says that amount will go to individuals receiving certain Social Security, Supplemental Security Income, Railroad Retirement benefits and veterans’ benefits. This money will be sent out as a separate check. The logistics for distributing the $250 payments have not yet been announced. The assumption, however, is that the IRS will follow a plan similar to the 2008 stimulus payments. Many retirees work part-time to supplement their government benefits. In these cases, the older workers will not get both the full $400 Making Work Pay credit and the $250. Any payments received for Social Security or similar benefits will reduce the payroll credit amounts a worker gets, tax analyst Luscombe says. Self-employed workers are on their own. “There is not an automatic methodology for reflecting this credit,” Schwartz says. “If you feel you’re eligible for it, you might want to take it into account in determining what your quarterly estimated tax payments should be.” Otherwise, you can claim the amount when your file your return next year. AMT also covered
The new law also makes a temporary adustment to the income levels at which the alternative minimum tax kicks in. This costly parallel tax has ensnared many middle-income filers primarily because those earning amounts do not automatically increase each year to reflect inflation. Under the new law, the AMT income exemption level increases to $46,700 for single filers, $70,950 for couples who file jointly. “Congress has been applying a one-year patch every year for several years now, usually late in the year,” Luscombe says. “Like previous legislation, this provides a little bump designed to continue the status quo. If you were in the AMT before, you probably still will be. If you weren’t, then you probably won’t be in 2009.” Luscombe says the AMT provision isn’t likely to have much effect on the overall economy, but it will lessen uncertainty and help people plan their tax moves earlier in the year. More credit for your children
Some parents will get extra credit for their kids via a more generous refundable portion of the , also known as the “additional” child tax credit. With the child tax credit, parents can claim $1,000 per child. But if their tax bill is less than $1,000, the credit can only be used to offset the amount owed. Some parents can recoup the excess credit even if they owe no taxes by claiming the additional child tax credit portion. The exact credit amount is based on 15 percent of income above the threshold amount. Under the economic-stimulus package, the earnings threshold to qualify for the child tax credit falls to $3,000 in 2009 and 2010 from the 2008 level of $8,500. “If these changes are figured into withholding, taxpayers will have a few extra dollars in every paycheck, which they presumably will spend,” Luscombe says. Breaks for lower-income workers
The law also tweaks the earned income tax credit, or EITC, expanding this tax break for lower- and middle-income workers for the 2009 and 2010 tax years. The income range in which the credit is phased out has been increased, meaning these workers will be able to keep more of the credit even if their incomes increase. Eligible families with three or more children also will see an increase in their payments, collecting as much as $629 more in 2009. Related Links: Expenses cut tax bill Report investment income Related Articles: SHARE: Kay Bell Related Articles