Congress passed the Making Work Pay Credit effective for 2009 and 2010, creating a credit for nondependent taxpayers earning at least $6,541 ($12,903 for MFJ). The credit phases out if earning $75,000-$95,000 ($150,000-$190,000 MFJ). For income-eligible taxpayers, this essentially lowers your tax by $400 ($800 for a working couple). Social security recipients will directly receive a one-time $250 check in the mail. Government retiress who are not receiving social security must file a 2009 tax return to claim their $250 credit. However, as with most laws, the tax calculations and side consequences are inevitable.
For working taxpayers, instead of receiving checks in the mail similar to the rebate checks in 2001 and 2007, you will see the credit via less withholding. The way it works: Starting in April 2009 for eligible taxpayers, employers were required to withhold a little bit less in your paycheck, so by the end of the year, you would realize an extra $400 in take-home pay.
The tax return will calculate the $400/$800 credit. Now you might think that the tax tables would simply be adjusted downward by the corresponding amount so it would even out, but because everyone isn't eligible, the tax tables remain the same. The credit will be added in the tax return as if you still had that amount withheld. Therefore, your final tax result should come out to be the same, if all else identical.
However, if a taxpayer worked more than one job, he/she may end up with over $400 in decreased withholding. (Employers are required to follow the new withholding amounts.) Social security recipients who received the $250 check and also worked, may have had $400 decreased withholding in their paycheck, and with only a $400 credit, they may not meet their tax liability if identical to the previous year. Self-employed taxpayers who are responsible for their own withholding, could reduce their payments by $400 or just benefit upon getting the credit caculation when they file the tax return.
The final tax liability is a result of many things: income level, investments, expenses, etc., so anyone who may be affected by the side consequences would only have to be concerned if they normally have a large balance due each year. Affected taxpayers usually receiving refunds would simply see a little less refund due to the overwithholding.
In most cases, the effect of the Making Work Pay Credit may prove to be invisible, as many taxpayers may not have noticed the $12-14 (if weekly) increase in their take-home pay, but also may not see any difference in their tax return because the applicable amount will be credited to their tax payments.