Thursday, January 21, 2010

MAKING WORK PAY CREDIT

MAKING WORK PAY CREDIT.
This is a very confusing credit.
If you are employed, you got the credit in the form of the reduced withholding, so that would lead you to think you won’t get it again as a credit on your income tax return—RIGHT? WRONG!

At first glance, it looks like you are double-dipping if you get it both as a withholding reduction and again when you file your taxes.
Here’s how it works. If it hadn’t been for the credit your tax withholding would have been, for example, $5000, but only $ 4600 was withheld due to the $400 credit (assuming you are single).

Now you file your taxes. The tax tables were NOT adjusted to take into account the credit, so your tax, before credits and payments, is $ 5000. You get the $400 credit on the tax return which now reduces the balance due to $ 4600. Your employer wilthheld $ 4600, so now you owe nothing.

Why didn’t they just change the tax tables you might ask. The reason is that not all income qualifies you for the credit. It only applies to EARNED income, not to dividends, interest, rent, royalty or winning the lottery.

One more fly in the ointment: if you make too much money there is a phase-out. For a single person, the credit is reduced by 2% of all adjusted gross income in excess of $75,000. So if your AGI was $100,000, the 2% would be greater than the $ 400 credit and you would get no credit and your withholding would have been reduced as if you were getting the credit.

HOW TO CLAIM THE CREDIT:
To claim the credit, you should prepare Schedule M and include the credit on your Form 1040.

IGNORE ANY COMMENTS BELOW REGARDING GET-RICH-QUICK SCHEMES

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Angie R. said...

Thanks for explaining. I just filled out my forms and immediately thought "this must be double-dipping." Thanks for your explanation. I haven't found anyone else addressing this particular angle. Now I can breathe a bit more easily.