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Making Work Pay Credit May Be Mixed Blessing, CCH Says

(RIVERWOODS, ILL., April 14, 2009) – Many people will start seeing the effects of the economic stimulus measures signed into law on February 17 in their paychecks and monthly pension payments soon – but some may find the extra cash to be a mixed blessing, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). What the IRS gives now, it may take back next April.

In March, the IRS issued new withholding tables designed to deliver the Making Work Pay Credit to wage earners over the course of this year. Some employers may have started using them in that month, since the IRS has asked them to adopt the new tables “as soon as possible,” but in any event, they must be used for payrolls after April 1, 2009.

The credit is figured as 6.2 percent of wages, to a maximum of $400 for a single taxpayer, $800 for a joint return. It begins to phase out at adjusted gross incomes of $75,000 for single filers and $150,000 for joint filers and decreases to zero when adjusted gross income hits $95,000 for single filers; $190,000 for joint filers.

“The withholding tables are designed to deliver the correct credit amount depending on the filing status that’s on file with your employer, reduced by the phaseout, if that applies,” said Mark Luscombe, JD, LLM, CPA and CCH Principal Federal Tax Analyst.

But problems can arise if joint filers are also joint earners or if someone has two jobs or significant amounts of self-employed or investment income.

“The withholding tables may deliver two credits, instead of one, or they may not be able to recognize that a phaseout has been reached,” Luscombe said.

Problems for Benefit Recipients, Pensioners

People who are collecting certain benefits as well as earning wages may also end up receiving too much. In late April or early May, recipients of Social Security, Railroad Retirement and Veteran’s Administration benefits are scheduled get a one-time payment of $250. But if they are also employed, they will receive the Making Work Pay Credit, and the total they can receive from the two programs is limited to $400. Any excess can lead to higher taxes.

Retirees receiving periodic pension payments may also want to take a look at their monthly checks to see if they’re growing too large.

“The IRS has said that the new withholding tables reflecting the Making Work Pay Credit should be used for pension payments as well as wages, but since the credit only applies to earned income, this would lead to under withholding,” Luscombe noted.

How Big a Problem?

Just how big a problem might you encounter due to under withholding connected with the Making Worth Pay Credit? Chances are, not a large one, Luscombe says.

“Most people end up getting refunds of federal income tax, meaning that over withholding is more common than under withholding to begin with,” Luscombe said. “Also, many people opt out of withholding on monthly pension checks, so they won’t be affected one way or the other.”

The IRS can’t ensure that under withholding doesn’t take place, but they have issued a revised publication that can help taxpayers help themselves.

Publication 919, How Do I Adjust My Tax Withholding, available on the IRS web site (irs.gov), now includes a table to account for the Making Work Pay Credit and a section on “Retirees Returning to the Workforce” that is relevant to social security beneficiaries and pensioners, whether they are returning to the workforce or not.

“It’s a fair amount of work to go through all the relevant worksheets, but If you find that too much or too little is being withheld, you can file a new W-4 or W-4P form with your employer to balance things out,” Luscombe noted. “The irony is that you may have to work to make the Making Work Pay Credit work for you, rather than against you.”

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Amo ng its market-leading products are The ProSystem fx® Office, CCH® TeamMate, CorpSystem®, CCH® IntelliConnect™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal, and regulatory sectors. Wolters Kluwer had 2008 annual revenues of €3.4 billion, employs approximately 20,000 people worldwide, and maintains operations in over 35 countries across Europe, North America, Asia Pacific, and Latin America. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Visit www.wolterskluwer.com for information about our market positions, customers, brands, and organization.

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