The “Making Work Pay” tax credit has many taxpayers confused, and for some, the confusion has led to the shock of smaller or delayed refunds.

The Making Work Pay tax credit replaced the 2008 federal stimulus checks for 2009 and 2010. You likely received an increase of $10 to $13 in your paychecks starting in April 2009.

Most taxpayers already received the benefit for 2009 through reduced federal withholding. Even if you received this benefit in each paycheck, you’ll generally still need to claim the credit on your 2009 tax return. The credit on your federal return makes up for the reduced withholding throughout the year.

The refundable credit is worth 6.2 percent of your earned income, up to $400 for individuals and $800 for married couples filing jointly. If you don’t withhold federal taxes, you must file a federal tax return to receive the credit.

The credit phases out for married couples filing jointly with an modified adjusted gross income (MAGI) between $150,000 and $190,000, and for single taxpayers whose MAGI is between $75,000 and $95,000.

Why the Making Work Pay Tax Credit means smaller refunds for some taxpayers

When the federal withholding tables were adjusted for Making Work Pay, most taxpayers didn’t adjust their withholding. Although the IRS says the vast majority of workers withheld enough during 2009 and can still expect a refund, some may have had too little tax withheld, especially:

Married couples with two incomes
Individuals with multiple jobs
Pensioners
Dependents
Some Social Security recipients who work
Workers without valid Social Security numbers

As a result, these groups may receive smaller refunds or owe a small balance of taxes for 2009. If you happen to owe taxes because too little was withheld during 2009, the IRS may waive any estimated tax penalty if it relates to changes made to withholding tables.

Why the Making Work Pay tax credit has delayed some tax refunds

The same tax act that included the Making Work Pay credit included two provisions that reduce the credit amount.

Retirees, disabled individuals and Supplemental Security Income recipients receiving benefits from the Social Security Administration, disabled veterans receiving benefits from the Department of Veterans Affairs and those receiving benefits from the Railroad Retirement Board received a one-time economic recovery payment of $250 in 2009.

Government retirees who don’t receive social security can claim a one-time $250 refundable credit on their 2009 federal tax return.

Economic recovery payment and Government Retiree Credit amounts must be subtracted from any Making Work Pay credit amount. Many taxpayers have failed to do so, resulting in rejected returns and delayed refunds.

For example, if you’re eligible for both the Making Work Pay and Government Retiree credits, your $250 Government Retiree Credit will be subtracted from the $400 Making Work Pay amount. You’d still receive the full $400 through two credits, with $150 coming from the Making Work Pay credit and $250 coming from the Government Retiree Credit.

Get the Making Work Pay tax credit right on your 2009 tax return

If you’re uncertain whether you received the $250 Economic Recovery Payment, verify that information before doing your taxes. Contact the Social Security Administration, Department of Veterans Affairs or Railroad Retirement Board.

Taxpayers filing Form 1040 or 1040A should figure the Making Work Pay Credit amount using Schedule M. If filing Form 1040-EZ, use the worksheet for Line 8 to figure the credit.

Because the credit also applies for 2010, adjust your federal withholding if necessary through Form W-4, Withholding Allowance Certificate. Married couples filing jointly and individuals with multiple jobs should complete the W-4 dual earner worksheet.

Since the credit is being spread out over 12 months rather than nine months, your 2010 paychecks will likely be a few dollars less than last year’s. However, you’ll still receive the full credit amount you’re due.

For all details of the Making Work Pay credit, visit the IRS Web site, www.irs.gov. File your income tax return online with #1 rated TurboTax. Start Now!

– Article Courtesy of ARAcontent