stimulus act (“American Recovery and Reinvestment Act of 2009,”
or ARRA) created the “Making Work Pay” (MWP) tax credit, an
Obama campaign proposal to offset part of the Social Security
taxes paid by low and middle-income workers. ARRA made the
credit effective only for 2009 and 2010. The president proposes
to extend the credit for one year through 2011 at an estimated
cost of $61 billion.
MWP provides a refundable tax credit equal to 6.2 percent of
earnings (the employee share of the Social Security payroll
tax), up to a maximum credit of $400 for individuals ($800
for couples). Neither nonresident aliens nor taxpayers claimed
as dependents by other taxpayers are eligible for the credit.
Couples may claim the full $800 credit, even if only one spouse
The credit phases out at a rate of 2 percent of income over
$150,000 for married couples filing joint tax returns and
$75,000 for others. Therefore, couples with income above
$190,000 and others with income above $95,000 are not eligible
to receive the credit.
The credit offsets the regressivity of payroll taxes and
encourages low-income people to work. Because workers in the
phaseout range would face higher marginal tax rates, however, it
could give those workers an incentive to work less.
MWP would reduce income taxes for three-fourths of all tax units
in 2011 by an average of $385, raising average after-tax income
by 0.7 percent. The credit is highly progressive: after-tax
income would rise by 2.6 percent for the poorest 20 percent
(quintile) of households, compared with 1 percent for the middle
quintile and 0.2 percent for the top quintile.
Five Important Facts
about the Making Work Pay Credit
taxpayers are eligible for the Making Work Pay Tax Credit in
2010. The credit is based on earned income and is claimed on
your 2010 tax return when you file your taxes in 2011.
On their website,
the IRS lists five things
the IRS wants you to know about this tax credit to ensure you
receive the entire amount for which you are eligible.
1. The Making Work
Pay Credit provides a refundable tax credit of up to $400
for individuals and up to $800 for married taxpayers filing
larger paychecks, reflecting reduced federal income tax
withholding during 2010.
3. Taxpayers who
file Form 1040 or 1040A will use Schedule M to figure the
Making Work Pay Tax Credit. Completing Schedule M will help
taxpayers determine whether they have already received the
full credit in their paycheck or are due more money as a
result of the credit.
4. Taxpayers who
file Form 1040-EZ should use the worksheet for Line 8 on the
back of the 1040-EZ to figure their Making Work Pay Credit.
5. You cannot take
the credit if your modified adjusted gross income is $95,000
for individuals or $190,000 if married filing jointly or
more, you can be claimed as a dependent on someone else
return, you do not have a valid social security number or
you are a nonresident alien.