Question:

I heard about the Stimulus Package that is supposed to give us more money in our paychecks. Could you please explain how it works and how much extra money I can expect?

Answer:

You are probably referring to the “Making Work Pay” tax credit that was passed as part of the Economic Recovery Package in February of this year. Rather than sending stimulus checks to taxpayers, the Making Work Pay tax credit operates by reducing federal tax withholding from paychecks. Most wage earners have already started receiving larger paychecks because of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit.

The additional amount that employees take home as a result of the tax credit depends on the individual’s salary, marital status and exemptions. In tax years 2009 and 2010, the Making Work Pay provision will provide a refundable tax credit of up to $400 for individuals, and up to $800 for married taxpayers filing joint returns. Singles eligible for the credit might see an increase of $10-$15 per paycheck if they are paid weekly. Taxpayers who are married and filing jointly may see an extra $15-$20 per paycheck. The full credit will be paid to people with modified adjusted gross incomes of $75,000 or less ($150,000 per couple.) A partial credit will be paid to those individuals making more than those amounts, but couples earning more than $190,000 and individuals earning more than $95,000 will not benefit from the Making Work Pay tax credit.

Self-employed taxpayers, and taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return filed in 2010. Self-employed individuals should evaluate their expected income tax liability and determine whether they want to make any adjustments in their estimated tax payments.

Lower income workers may not make enough money to have taxes withheld once their exemptions are taken into account, so they may not see any change in their paychecks. However, these workers will be eligible to claim the full credit when they file their 2009 tax returns.
Adults who received Social Security, Railroad Retirement or Veterans Administration retirement benefits in November or December 2008, or January 2009, will get a one-time, $250 credit payment sometime in mid-June 2009. These payments will be made by the same method that the individual receives their retirement benefits, i.e. direct deposit or check.

The IRS cautions that some people may get a larger credit than they are entitled to. If you have two jobs, and both of your employers pay you the full tax credit, you may end up owing taxes when you file your 2009 return. To avoid this situation, check with both of your employers to confirm they are withholding the correct amount. Individuals who receive income from a rental property or investment, such as interest and dividends may also receive a larger credit than they are entitled to. The IRS website at
http://www.irs.gov/newsroom/article/0,,id=204447,00.html
has a calculator that you can use to determine the correct withholding based on your income.

Employers should check and make sure they are using the new adjusted federal tax withholding tables, which are also available on the IRS website.
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