Making Work Pay Credit

In March of last year, I wrote a column on the (then) new Stimulus Plan that congress and President Obama enacted. At that time I advised those of you who still have earned income that you would see an increase in your take home pay of about $13 per week. However, I also warned you that you would likely have a problem filing your taxes in 2010, because there was no provision to lower your tax rate in order to make the payment tax-free.

Now I have some good news for you. That additional money in your paychecks from April through December may be erased from your taxable income as a credit after you compute your federal tax. However, it won’t be credited unless you submit an extra tax form, Schedule M, with your federal tax forms.

The credit, which is titled the “Making Work Pay Credit”, is even better than a reduction of your taxable income. It is actually a direct reduction of your tax. I’ll explain that in a moment.

(At this point, if you are retired like I am, and have no earned income–an entry on line 7 of your 1040–then you may as well quit reading right here, because you already received your stimulus payment of $250 back in April of 2009, and it was already tax-free)

If you received that increase in pay back in April, then you have already received your stimulus payment in increments, but now you have to account for that extra money to deduct it from your taxable income. To do that, you must file Schedule M with your tax forms.

I am not a tax preparer–although I once did work for H&R Block in that capacity for several years–so I will not attempt to give you instructions on how to fill out Schedule M. It is, like most tax forms, comprehensive–a long erudite word meaning “complicated.”

The maximum credit is $400 ($800 if married filing jointly) and there are a lot of conditions and exceptions that must be met or overcome to get that amount. The good news is that whatever amount you are able to deduct comes off dollar-for-dollar from your tax. Hoorah!!!

Let me explain… There are three types of reductions to your income tax, deductions, exemptions and credits and all are good. However, one is better than either of the other two, and that is the credit. Deductions and exemptions reduce your taxable income, but a credit actually reduces your tax. That is why credits always are figured after you arrive at taxable income and compute the tax on that amount.

While deductions and exemptions reduce your taxable income by whatever tax bracket–or percentage–you are in, credits always reduce your tax liability at 100%, or dollar-for-dollar.

For instance, if you are married, filing jointly in the twenty-five-percent tax bracket–you pay 25% tax on your last dollar of income–and you use the standard deduction of $11,400 (2009 amount), then you are actually deducting $2,850 from your tax liability. Let’s say your total tax comes to $3,000 after you deduct and exempt all the legal amounts. If you get a credit of $800 for the Making Work Pay Credit on Schedule M, you get to subtract that entire amount from the $3,000, making your tax due only $2,200. That erases $3,200 from your earned income ($3,200 X .25 = $800). Pretty neat, eh?

I suppose I should complain here that my wife and I didn’t get $800 off our taxes, and we only received $500 tax-free from Social Security. However, we are no longer productive members of society (ie.-workers) so I will take what I got and be happy with it. Besides, we don’t have to fill out that Schedule M, and that itself is worth it.

Okay, now you know. Don’t forget to file Schedule M and take your tax credit. Oh, if you use a tax service like H & R Block or Jackson-Hewitt, they will do the calculations for you, and even if you use TaxAct or TurboTax software, that will also include the credit calculations for you. I recommend that you use TaxAct online anyway to check your work since it is a free service for the federal return.