Earlier this year, you may have noticed that the federal tax withholding was decreased on your paychecks. This tax credit is called “Making Work Pay” and is part of the American Recovery and Reinvestment Act – more commonly known as the economic stimulus package.

he “Making Work Pay” provision can provide up to a $400 tax credit per year for individuals or $800 per year for couples (married filing jointly). Through this provision, eligible individuals will receive an income tax credit for two years (2009 and 2010 tax years). Like other tax credits, this credit will reduce a person’s tax liability on a dollar-for-dollar basis.

So who is eligible? Most taxpayers are eligible, but anyone who can be claimed as a dependent on someone else’s tax return is not eligible. Additionally, nonresident aliens, estates and trusts do not qualify for this credit.

There are also income limitations on this credit. These income phase-out limitations could lead you to withhold too little during the tax year, which could cause you to owe taxes at the end of the 2009 tax year. You may need to review your current income status to determine if you are withholding too little.

The “Making Work Pay” credit is phased out at a rate of 2 percent of your modified adjusted gross income (AGI) above $75,000 ($150,000 for joint returns).

This means that the amount allowable as a credit for the tax year is reduced by 2 percent for every dollar of your modified AGI over $75,000 ($150,000 for joint returns).

Here are a few examples.

 

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Single taxpayer (partial credit) – For 2009, a single individual who had a modified AGI of $90,000 would calculate his or her credit as follows: $400 (total credit available) – (2 percent x ($90,000 - $75,000)) = $100. So, this taxpayer is eligible for a partial tax credit in the amount of $100.

Couple (joint filers) taxpayers (partial credit) – For 2009, a couple that had a modified AGI of $180,000 would calculate their credit as follows: $800 (total credit available) – (2 percent x ($180,000 - $150,000)) = $200. So, this couple is eligible for a partial tax credit in the amount of $200.

Single (no credit) – For 2009, a single individual that had a modified AGI of $100,000 would calculate his or her credit as follows: $400 (total credit available) – (2 percent x ($100,000 – $75,000)) = -$100. So, this individual is not eligible for the tax credit because of income phase-out limitations.

Couple (joint filers) taxpayers (no credit) – For 2009, a couple that had a modified AGI of $200,000 would calculate their credit as follows: $800 (total credit available) – (2 percent x ($200,000 - $150,000) = -$200. So, this couple is not eligible for the tax credit because of income phase-out limitations.

The credit is based on taxable wages and is not available to many retired and other individuals whose income may not come from wages. The law includes a one-time payment of $250 to retirees, disabled individuals, SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans’ Affairs.

This one-time payment is a reduction to any allowable “Making Work Pay” credit. Also, a one-time refundable tax credit $250 is being provided to certain government retirees who are not eligible for Social Security benefits in 2009.

Looking for professional help with your taxes? Consider letting First Command Tax Services handle your return. Our experienced tax professionals are ready to help. And if you prefer to prepare your own return, our website at www.firstcommandtaxservices.com  offers a number of helpful tools for tax preparation and planning, including information about recent tax law changes, access to tax preparations documents and several online calculators.

For more information, talk to your First Command Financial Advisor or contact First Command Tax Services at (877) 356-0399 option 5 or taxservices@firstcommand.com.

First Command Tax Services is the exclusive tax preparation services of First Command Financial Planning, Inc. (Member SIPC, FINRA). This article is provided for information purposes only and should not be considered tax or legal advice. Should you require tax guidance specific to your situation, please contact a tax or legal professional.