Making work pay credit may result in underwithholding, government watchdog warns
You have likely noticed a small increase in your take-home pay since spring. That’s when the new federal Making Work Pay (MWPC) tax credit kicked-in. For some individuals, however, the MWPC could result in an unpleasant surprise when they file their 2009 returns in 2010. A government watchdog recently warned certain taxpayers to be prepared for possibly lower than expected refunds next year or even having to repay the MWPC.
Temporary credit
The MWPC is a temporary refundable tax credit of up to $400 for single individuals and up to $800 for married couples filing joint returns. The MWPC is available in 2009 and 2010. The MWPC is not a tax credit you claim on your federal tax return. Rather, it is being delivered through automated withholding changes. Most workers see the MWPC in their paychecks.
Employers are using income tax withholding tables that the IRS revised earlier this year. The revised income tax withholding tables incorporate the MWPC. For many workers, the revised tables result in slightly higher take-home pay. For others, however, the revised tables may result in too little federal income tax being withheld.
Six groups
According to the Treasury Inspector General for Tax Administration (TIGTA), some 15 million individuals may be advanced more of the MWPC than they are entitled to receive. The problem is most acute for six groups of taxpayers:
- Single individuals with more than one job
- Married couples filing joint returns where both spouses work or where one or both spouses have more than one job
- Individuals who receive pension payments
- Individuals who are employed and receive Social Security benefits
- Dependents who receive wages
- Individuals who file a return without a Social Security number
If you fall in one of these categories, please contact our office. Our office can do a quick check to make sure that your withholding is correct. You may need to adjust your withholding to ensure that the MWPC will not result in having too little income tax withheld.
Pensioners
Pension recipients should also do a withholding check up. The IRS issued special adjustment procedures for the MWPC but not all pension plans have implemented them. Consequently, some pensioners may end up with reduced refunds or possibly having to repay part or all of the MWPC.
Dependents
Two groups are ineligible for the MWPC. They are individuals who may be claimed as dependents and individuals who file their returns using an individual taxpayer identification (ITIN) because they do not have a valid Social Security number. In both cases, these taxpayers will have to repay the MWPC.
Penalties
TITGA also warned that the IRS may impose penalties for insufficient withholding. The IRS has indicated that it will be open to removing these penalties if taxpayers request a waiver. If you receive a penalty notice from the IRS, please contact our office immediately.
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