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Watch Out for the Making Work Pay Credit (2009 Economic Stimulus)

This article was written by in Taxes. 24 comments.


Smithee has been keeping me up-to-date with a major part of the 2009 economic stimulus, the $400 for individuals or $800 for couples tax credit. Here are some things to keep in mind about this stimulus going into effect today, called the “Making Work Pay” credit in the law that established it. Smithee says the $400 or $800 credit could have been dumber, but I find it smart and dumb for different reasons.

This variation of the economic stimulus is taking the form of a small bonus in each pay check from April through December. The increase will occur thanks to an automatic change in tax withholding put into effect by your employer.

A small increase in each pay check is “better” than receiving a lump sum payment. I suppose this depends on the definition of “better.” First of all, the lump sum payments to taxpayers in 2001 and 2008 did little to stimulate the economy directly. Surveys suggested that recipients used the lump sum as “found money” or an increase in wealth and directed the funds towards savings accounts and debt repayment. In normal circumstances, adding a lump sum to savings on a large scale should boost the economy, though not as much as spending. The theory is the banks will take the deposits and turn the money around by lending money to businesses. But thanks to the “credit crunch,” that didn’t happen in 2008.

Also, when lump sums do encourage spending, it’s usually for large purchases. If you buy an electronic device, clothing, a car, or most other large purchases, you aren’t necessarily boosting the local economy. When stimulus is presented in small bits over time rather than one lump payment, is is perceived as an increase of income rather than wealth and it encourages a gradual incorporation of the extra money into daily spending. Tax payers are more likely to spend the extra stimulus, even if it is only about $10 to $20 a week. Perhaps this increase will mean one more dinner at a restaurant, contributing to the health of local businesses.

While the form of the credit is good, I expect more problems a year from now when it’s time to file 2009 income taxes based on the fiasco that was the 2008 economic stimulus credit.

The Making Work Pay credit is a new tax credit that will be claimed on 2009 and 2010 income tax forms. In 2008, millions of tax payers received an economic stimulus payment, essentially new money to be spent or saved. But when the time approached for filing 2008 income taxes, the Recovery Rebate Credit appeared on 2008 income tax forms. Much confusion ensued. The 2008 economic stimulus payment was simply an advance of this new Recovery Rebate Credit. So those who already received the economic stimulus payment could not claim the Recovery Rebate Credit. If they could, they would have been receiving the same credit twice.

The confusion that this created is bound to return in the form of the Making Work Pay credit. The extra tax withholding starting today is an advance of the Making Work Pay credit, which will likely appear as another line item on the 2009 income tax forms, just like the Recovery Rebate Credit.

Many people will have the correct amount of tax withheld. Your employer makes a number of assumptions. First, your employer knows about only the income they provide you. If you earn $60,000 from your day job, your employer will adjust your withholding because based on the information they have you qualify for the tax credit. If you earn an additional $40,000 outside of your primary job from your investments or from a second job, your total income disqualifies you from receiving the Making Work Pay credit. If you don’t instruct your employer to adjust your withholding, you will have to repay the credit to the government when it comes time to file your tax return.

Second, if you are married, filing jointly, and your spouse works, both employers may reducing withholding enough for the entire couple. In this situation, similar to the above, you could end up owing the government money for receiving too much in your pay checks.

Some employers began offering the reduced withholding early. The new withholding formulas are based on calculations assuming the adjustment occurs on April 1. Some employers have opted to adjust the withholding early. As a result, the employer will be offering employees a larger credit than they are entitled to. Any under-withholding as a result will be sought by the IRS when tax payers file 2009 income taxes. If an employer applies the new withholding formula late, then the employee may be entitled to an additional credit when he or she files the return.

Economic stimulus payments, to be effective rather than to be seen as “bread and circuses” or politicians buying votes from the public, should be incorporated into income as much as possible, but shouldn’t be buried in the tax code, creating confusion and frustration among taxpayers.

Updated September 17, 2011 and originally published April 1, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 8 comments… read them below or add one }

avatar rick

The lump sum/small increment discussion as a form of stimulus is not worth having. Both are bad. “Stimulus”, such as it is called, but certainly is not, is always a political tool to drive votes and support, NOT a real economic tool.

Particularly now. “Stimulus” is just more borrowing by the government. In fact, the incremental additions to each paycheck simply increases government debt because the no interest loans they once received are now much diminished. At least a portion of the lump sum payments we got were offset by interest rate gains. The assumption with the incremental addition is that a “spark” of economic activity will offset the loss of no interest loans.

No such luck. I actually spent my stimulus check last year – hard goods are suffering most, and I wanted a new TV since they were getting cheaper so rapidly. Unfortunately, the incremental paycheck stimulus will only serve to increase prices on goods that we complain about most – gas, food, clothes. Lump sum payments were usually spent on larger goods, which are less visibly inflationary.

There will be no spark from this, because it is not well designed, as usual.

1. IF the economy is “turning the corner” (something I thought 3 months ago, now I’m less sure of due to the near doubling of the US debt load by the administration), it was doing so of its own accord – not due to a stimulus.
2. IF the economy is to “turn the corner”, it has to do so on the back of real growth development, not credit based growth development (such as a stimulus borrowed on the future)
3. IF consumers wish to dig their way out to a better tomorrow, they cannot rely on the government to help them do it, nor should they. It’s fool’s gold.

The “stimulus” may give a short term boost (who knows when or if it will, but politicians like to claim victory when non is visible), but the reality is something quite different – we face larger and more damaging deficits as a result. For all the rhetoric Obama has laced the Bush administration with regarding fiscal irresponsibility, his first 3 months make Bush look like a piker.

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avatar Lance

I need some help. My employer put in the new tax tables for this credit and it is effective on the payroll for this week.

When I look at my pay stub, I see a $62 increase. I am paid bi-weekly so that means there are 19 more paychecks this year which would mean an additional $1,178. This is a lot more than the $800 per couple. This doesn’t include any increase on my spouses pay!

What gives? Is this impacted by how many allowances I claim on my W4? Earlier this year I increased my allowances to avoid a big refund next year. Wanted to be around $500 instead of $2,500, so used the IRS and employer calculators and tax tables and both indicated that I needed to change from 2 allowances to 6. I’m ok with breaking even but I’d like to not owe anything.

Any ideas?

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avatar Rick

I’d suggest reducing allowances.
The question of taking the money now as opposed to later is always a hard one. Accountants tell me “take it all and get the interest”. I’d agree, except that if I did take it all, I’d spend it! Something I don’t want to do.

I look at the refund as a “bonus” for being smart. I learn to live on a reduced income, I have to manage my savings with more money being sent to the government, but then I get a nice fat check once a year for being good with my money.
Sure, the government gets an interest free loan – but the amount of money I’d make if I ACTUALLY saved the cash is minuscule – something like $200/300. Sure, money’s money. But I’d rather get the big fat check. Then I save a portion and spend a portion.

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avatar Lance

Sorry I’ll have to disagree. Completely.

I’m not about giving the government any more of my money than I’m obligated to do. I don’t want a “big fat check.” I will not just spend it because it’s there.

We live on a very strict zero balanced budget so every penny is put somewhere before pay day. I’m not concerned with my number of allowances. They are at the correct level for keep my money and still get $500 refund.

I’m only concerned with the impact of the credit. It’s supposed to only be $800 per couple and it appears we are getting significantly more than that on my paycheck alone, much less my spouses.

I did not intend for this to be about whether or not you get a big refund or keep you money throughout the year, that a whole other topic to discuss…well really it’s just about whether or not you disciplined enough to save you money or not.

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avatar Rick

I was only comparing my views on withholding and how I deal with it to yours, not making a recommendation on what you should do.
But opinions are worth sharing, because they improve our thought processes.

Still, I made a recommendation on how to avoid having too much taken out (reduce allowances). I can’t explain why you’d get more than the supposed $15 a week the plan is supposed to give back.

But to help fix it…try this:

http://www.irs.gov/individuals/article/0,,id=96196,00.html

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avatar Lance

I plan to use the IRS calculator when I get my spouses most recent pay stub.

You’re right though, I could just reduce the allowances or I could just have them take out $30 or $45 per paycheck extra to offset the credit. Either way I would have to make an adjustment to my W4. Luckily for me that’s an online for with my employer so the process is very simple.

Thanks for the link.

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avatar Andy

The good news at least is that this credit has been extended in 2010. It is a small amount, but every little bit helps. But from what I hear, the IRS has been having a lot of problems processing this credit for senior and those not recieving the payment through their employer.

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avatar dan

what if i got my taxes back with the making work pay credit but i dont have a job anymore. will i owe taxes?

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