Making Work Pay Credit Will Most Likely Cause IRS Back Taxes

At the beginning of this month, the Treasury Inspector General released a report describing the negative effect that reduced withholding associated with the Making Work Pay Credit (MWPC) could cause. What the report mentioned is that 15+ million taxpayers could owe taxes when filing in 2009 and 2010 due to the fact that the withholding tables failed to consider certain factors. Moreover, many taxpayers will receive no refund or a reduced refund and some may end up with Internal Revenue Service (IRS) penalties.

The MWPC is part of the American Recovery and Reinvestment Act (ARRA) of 2009 and will be in effect from 2009-2010. It served to provide working taxpayers with greater paychecks and most employers should have implemented any withholding changes April 1st. Anyone that received any stimulus payment from the Feds must understand as well that the payment will deduct from the MWPC which is the lesser of either 6.2% of earned income or $400 for working individuals and $800 for working joint or married filers. The MWPC reduces the amount of Federal tax withholding for taxpayers, however, the tables that were derived to calculate the withholding do not take into account:

• Those dependents who have a job or are being paid wages (1.6 million to be affected)
• Individual taxpayers that had to get two jobs or more during these tough economic times (2.5 million could be affected)
• Married couples or joint income tax filers who both have 2+ jobs (4.1 million could be affected)
• Any individual taxpayer who receives Social Security and has income from a job (687k could be affected)
• Taxpayers receiving pension(s) (6.3 Million could be affected)
• Taxpayers filing with an ITIN (about 87k could be affected)

Since the withholding tables do not adjust for taxpayers meeting certain criteria, some taxpayers will have to pay back some or all of the MWPC and many will be left owing IRS back taxes.  The IRS is doing what it can to inform taxpayers and companies that withholding tables that were changed with the AARA need to adjusted for certain types of taxpayers. The Dept of Treasury will release a report in the first quarter of next year to include updated audit results from their studies and the effects of the MWPC.

For the upcoming tax season, the IRS has released a withholding calculator to help taxpayers make the necessary changes to withholding now.