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IRS Issues Guidance on the Making Work Pay Tax Credit, Amending Form W-4

Important Information About How to Avoid Being Under-Withheld

Posted 04.30.09 by Fiscal Affairs

The IRS has posted 22 questions and answers on the Making Work Pay tax credit under the American Recovery and Reinvestment Act of 2009 (ARRA) on its website.  In tax years 2009 and 2010, ARRA provides a refundable tax credit of up to $400 for individuals and $800 for married tax payers filing joint returns.  The credit is phased out for individuals with modified adjusted gross income (AGI) of $75,000-$95,000 ($150,000-$190,000 for joint filers).

The guidance clarifies that employers are not required to make determinations with regard to an employee's eligibility for the Making Work Pay tax credit.  Withholding should be made consistent with an employee's filed W-4 (Employee's Withholding Allowance Certificate) and the newly modified withholding tables (see Publication 15-T ).

Several of the questions address the issue of employees who may want to file an amended Form W-4 to avoid being under- or over withheld by the end of the year.

  • Individuals working more than one job at the same time.  An individual who works two jobs concurrently may have reduced withholding, up to $400, at each job.  However, he or she will only be entitled to a credit of only $400.  Note that this problem does not arise for someone who moves from one single job to another single job (no matter how many times).
  • Married couples with both spouses earning wages may want to amend their W-4 to have more withheld.  The new tables, compared with those originally in place for 2009, will generally decrease federal income tax withholding by $600 for married individuals. So, while the tax credit caps at $800 for a married couple filing jointly, the new withholding tables may "give" them a total tax credit of $1,200 if they both earn wages.  Note that a married person with a non-working spouse will have $600 less in withholding but will be entitled to a credit of $800.
  • The new withholding tables are also being used for withholding from pensions, which are not "earned income".  Private pension recipients (who do not receive retiree or disability benefits from the Social Security Administration, Department of Veterans Affairs, or Railroad Retirement Board) are not eligible for the Making Work Pay tax credit unless they have earned income.  So pensioners may have $400 or $600 less withheld, even though this income is not eligible for the credit.
  • The one-time "economic recovery payment" of $250 in 2009 (paid to those receiving federal retiree or disability benefits from the Social Security Administration, Department of Veterans Affairs, or Railroad Retirement Board) may also throw off taxpayers' calculations.  For example, if both members of a married couple earn wages and receive social security benefits, they could each see a reduction in withholding and each receive a $250 payment from the SSA, amounting to a total assistance of $1700, even though they are only eligible for a credit of $800.