ShareThisMost workers should be getting a little extra in their paychecks, thanks to the Making Work Pay credit included in the stimulus bill.
Unfortunately, some people might have to pay all or some of the credit back when they file their taxes next year.
The credit is equal to 6.2 percent of earned income -- from a job or self-employment -- up to a maximum of $400 per person per year. A married couple can get up to $800 total, even if only one spouse works. Income limits apply. The credit is good for 2009 and 2010.
The government is issuing this credit by slightly reducing the amount of federal income tax withheld from employee paychecks. The Internal Revenue Service published new withholding tables reflecting the credit, and employers had to start using them by April 1.
Some people are not eligible for the credit, including high-income households, dependents and nonresident aliens. But some of these people might be getting the credit in error because the withholding tables can't always distinguish between who is eligible and who is not.
If you get the credit in error and do nothing about it, you could get a smaller-than-normal refund or a bigger-than-usual tax bill when you file your 2009 return.
The people most likely to have this problem are couples with two working spouses, workers holding two jobs at the same time, dependents, retirees having tax withheld from their pension payments and people who are working and receiving Social Security.
The people least likely to have this problem are couples with one working spouse and single people who have one job at a time and don't have a lot of unearned income.
If you are self-employed, you won't have a problem because you are not subject to withholding. If you are eligible, you can claim the credit when you file your tax return.
The same goes for employees who don't earn enough to have tax withheld from their paycheck but are otherwise eligible. They, too, can claim the credit next year.
How can you tell if you are getting the credit? Compare a paycheck from after April 1 with one from February and see if your federal income tax withholding has dropped. For most people getting the credit, the sum withheld will drop by about $10 to $15 a week.
If you think you are getting the credit in error, consider filing a new Form W-4 with your employer to avoid a tax surprise. Rather than using the Form W-4 instructions, use the IRS' new withholding calculator on its Web site. See http://www.irs.gov/individuals/article/0,,id=96196,00.html.
Here are some reasons you could get the credit in error:
-- You make too much. The credit phases out between $75,000 and $95,000 in adjusted gross income for single filers and between $150,000 and $190,000 for joint filers. If your adjusted gross income -- which includes income from investments and other sources outside your job -- exceeds those amounts, you are not eligible.
-- You are a dependent. If you can be claimed as a dependent on someone else's tax return, you are not eligible.
-- You work two jobs at the same time. Both employers could cut your withholding by up to $400 each, but you are only entitled to $400 total.
-- You and your spouse both work. "The new tables generally decrease federal income tax withholding by the end of the year by $400 for single individuals and $600 for married individuals," according to Scott Mezistrano, a senior manager with the American Payroll Association. If both spouses work, their combined withholding could be cut by $1,200, even though the maximum credit for a couple filing jointly is $800. This couple could owe $400 next year.
On the flip side, a married person with a nonworking spouse will have $600 less withheld but could be entitled to an $800 credit, entitling the couple to an extra $200 credit.
-- You are having tax withheld from a pension. Pension payments are not eligible for the credit because they are unearned income. But employers use the same tables to calculate withholding from paychecks and pension checks. If you have tax withheld from a pension, withholding could fall, even though you are not entitled to the credit.
-- You work and get Social Security. In the next few weeks, recipients of Social Security, Railroad Retirement and Veterans Affairs benefits are scheduled to get a one-time "economic recovery payment" of $250. If they are also employed, they could receive the Making Work Pay credit. However, the two payments combined cannot exceed $400, says Mark Luscombe, principal federal tax analyst with CCH. Someone who gets both payments might have to pay some of it back.
(Note: In lieu of the economic recovery payment, government employees who don't participate in Social Security can claim a $250 credit when they file their taxes next year.)
Nonresident aliens aren't eligible for the Making Work Pay credit, the stimulus bill says. One reader asks, "Does that mean nonresident aliens based on immigration status or tax status?" She says a colleague working in the United States on an H-1B visa (with a Social Security number) is a nonresident alien in terms of immigration status. However, because he meets the IRS' substantial presence test, he files his taxes as a resident alien, using Form 1040. Would he qualify for the credit?
IRS spokesman Jesse Weller says the answer is yes. "For purposes of the Making Work Pay credit tax provision, whether a person is a U.S. resident or a nonresident alien is determined by their tax status under the Internal Revenue Code."
(E-mail Kathleen Pender at kpender(at)sfchronicle.com. For more stories, visit scrippsnews.com.)
(Distributed by Scripps Howard News Service, http://www.scrippsnews.com)
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