“Making Work Pay” Tax Credit

I’m excited that the podcast had its two millionth download in February and even got some recent buzz on local radio stations and the evening news in the central Florida area where I live. Find a link to the interview video at moneygirl.quickanddirtytips.com—you may be surprised to see where I actually record the show!

This episode is about tax relief that’s coming soon for the majority of working Americans and their families.

Congratulations On Your Raise!

If you haven’t heard, the government is about to give you a raise. Yes, there’s a new tax credit on the horizon that’s going to mean more take-home pay for many Americans. Instead of issuing one, single stimulus payment check, Uncle Sam is going to “make work pay”. No, this isn’t retribution for the promotion you deserve but never got—it’s how your paycheck is going to give you some extra money!

The tax credit is typically going to be shelled out though payroll checks starting no later than April 1^st. The benefit will be spread out over the remaining months of 2009. If you don’t have taxes withheld by an employer, you can also claim the credit on your 2009 tax return. The credit is refundable, which means you get to take it even if you don’t owe any income tax.

How Much To Expect

This tax relief is part of the massive American Recovery and Reinvestment Act that became law earlier this year. It provides up to $400 for individual working taxpayers and $800 for married couples who file jointly. Be aware that the credit is phased-out, or reduced, for individuals who have an adjusted gross income between $75,000 and $95,000. The phase-out for joint filers occurs when adjusted income is between $150,000 and $190,000. So if you earn more than $95,000 as an individual, or $190,000 as a couple who files jointly, you won’t qualify for the credit.

How to Get It

You don’t need to complete any paperwork to trigger this payroll withholding change. The IRS has issued new withholding tables for employers to use right away to figure the reduced amount of taxes that should be deducted from gross pay. However, you will need to claim the credit amount that you receive on your 2009 tax return that’s due in April of 2010. And as I mentioned, if you don’t have taxes withheld by an employer this year, you can claim the full credit on your 2009 tax return.

What, No Check?

Most of the people that I’ve talked to about this tax credit seem disappointed that it won’t come in one fat check. Doling out $400 in small increments from April 1^st through the end of the year means a little over $10 a week in additional income. Not a lifestyle-changing amount, for sure. But the idea is that giving it out in small increments through reduced withholding will encourage taxpayers to spend it and therefore stimulate the economy. Behavioral economists know that when many of us receive a lump-sum check, we don’t spend it. We tend to see larger amounts as found money that provides us an opportunity to boost our savings or to pay down credit cards or other debt.

To Stimulate or Not

But here’s a tip if you’re determined to save those extra dollars: put them in your retirement account. If you’re eligible to contribute to a workplace 401(k), simply increase your contribution by $10 a week. If you’re eligible for a 401(k) but aren’t participating, get started (especially if there’s employer matching!).

And if you don’t have a 401(k), but do have earned income, it’s a great time to open an Individual Retirement Arrangement or IRA. Online brokerages such as etrade.com offer plans with no account minimums or annual fees when you sign up for e-statements. They give you access to stocks, bonds, exchange traded funds (ETFs), and thousands of mutual funds. Just $10 a week deposited in a retirement account instead of in your regular spending account can make a big difference in your savings over the years.

For much more information on planning and saving for retirement, check out Money Girl’s Guide to Retirement Planning, my newly released audiobook that’s on sale at Audible.com and in the iTunes store.

Don’t Make Work Overpay

Another tip I have about this tax credit is don’t get too much of it. If you have two jobs, for example, make sure they aren’t both calculating $400 in reduced withholding for you. If you have too little withheld, guess what? You’ll have to turn around and pay the excess back to the government at tax time. High earners could also find themselves having to give the money back if they take the credit but their annual adjusted income is too high to qualify for it. You can always submit a revised W-4 if you’re concerned about having too little taxes withheld from your pay. I’ll include a link to IRS Publication 919 which gives complete information about tax withholding. You’ll find even more resource links in the show transcript at moneygirl.quickanddirtytips.com.

For more, updated information about using the “Making Work Pay” tax credit to your advantage, please see this follow-up episode.

Administrative

If you recently left me a voicemail, I’m sorry to say that it got cut off at the very beginning and I didn’t get to hear your entire message. I don’t want to miss your question or comment so please send it to money@quickanddirtytips.com“>money@quickanddirtytips.com.

Chi-Ching, that’s all for now, courtesy of Money Girl, your guide to a richer life.

More Resources:

Tax Credit News Release

New Payroll Withholding Tables

The Making Work Pay tax credit

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