Friday, May 7, 2010


As I mentioned in my tax season review this year’s tax “gimmick” was BO’s “Making Work Pay” credit – a variation of Dubya’s economic “stimulus” rebate checks.

To his credit, no pun intended, BO did avoid the exorbitant expense and general debacle that was W’s rebate checks. However, like the checks, this credit caused great confusion.

The credit was based on 6.2% of earned income – W-2 wages and net earnings from self-employment – up to a maximum of $400.00, or $800.00 for a married couple filing jointly. The 6.2% rate is equal to the Social Security tax.

The original idea, put forth by the Democrats before Congress decided on the first set rebate checks, was a “payroll tax holiday”. The first, if $400.00 was the goal, $6,452 of wages paid to an employee during the year would be exempt from at least the employee share of Social Security tax. This would increase workers’ take-home pay by the intended $400.00. Doing it this way would result in minimal cost to the government. All the work would be done by the employer – and it would not impact the 1040 at all. All that needed to be done was to revise the quarterly Form 941.

Instead BO chose to make it an advance on a Form 1040 credit and issue it by FU-ing with the federal income tax withholding tables. As a result many retirees ended up being under-withheld, as pensions also use these tables to determine withholding. So did taxpayers with more than one job, married couples in general, and working dependents who did not qualify for the credit.

To be perfectly honest, I still don’t know how BO expected an additional $15.00 per week or so in take-home pay was going to save the economy.

The credit was calculated not on a worksheet in the instructions that would be kept with the taxpayer’s records but on a brand new tax form – Schedule M. Making more work for tax preparers and causing the death of more trees.

There has been much confusion regarding the MWP credit – both by taxpayers and the IRS. According to the Treasury Inspector General for Tax Administration – “TIGTA auditors analyzed 2010 filing season results as of the first week of March, 2010. As of that time, the IRS had paid some $24.2 million in erroneous Making Work Pay and Government Retiree Credits”.

Much of the confusion involved BO’s $250.00 “Economic Recovery Payment” send to Social Security and Railroad Retirement recipients. The MWP credit available to a taxpayer or couple is reduced by any ERP received.

John and Mary are both retired and receiving Social Security. Mary has a part time job in 2009, earning $10,000. Because the couple files a joint return they are entitled to a $620.00 MWP credit ($10,000 x 6.2%). However, because they each received a $250.00 ERP in May of 2009 the credit they will get is only $120.00 - $620.00 less $500.00.

A few of my clients had their requested refunds reduced by $250.00 – which was attributed to the MWP credit and the ERP. Any such reduced check should be followed by a notice explaining the reduction. If your refund is reduced review the explanatory notice carefully – or, more better, send the notice to your tax professional immediately. As with any other notice from the IRS, more often then not it is wrong.