The Internal Revenue Service has issued advice on how to claim the Making Work Pay Tax Credit that was included in the Recovery Act if an employer has not provided the full credit.

Making Work Pay offers a refundable tax credit in 2009 and 2010 of up to $400 for individuals and $800 for married taxpayers filing joint returns. For taxpayers who receive a paycheck and are subject to withholding, the credit is typically handled by their employers through automated withholding changes. However, taxpayers who receive less than the full amount of the allowable credit through reduced withholding will be entitled to claim any remaining credit when they file their tax returns.

The amount of the credit actually received during 2009 in the form of reduced withholding should be reported on the 2009 tax return. Taxpayers who do not have taxes withheld by an employer during the year can claim the credit on the 2009 tax return they file in 2010.

Taxpayers who file Form 1040 or 1040A should use Schedule M, “Making Work Pay and Government Retiree Credits,” to calculate the Making Work Pay Tax Credit. Schedule M can help taxpayers and their tax preparers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit. 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 Tax Credit.

In 2010, taxpayers may notice that their paychecks are slightly lower than in 2009. The slight decrease may be because of the Making Work Pay Credit. Most of the credit for wage earners is distributed through reduced withholding. The credit — which was spread out over nine months last year — is being spread over 12 months this year. A little less credit in each paycheck means slightly higher withholding.

“But don’t worry, in the end it all adds up,” said the IRS.

The IRS cautioned that certain taxpayers should review their tax withholding to ensure enough tax is being withheld in 2010. Those who should pay particular attention to their withholding include married couples with two incomes, individuals with multiple jobs, dependents, pensioners, Social Security recipients who also work, and workers without valid Social Security numbers.

Having too little tax withheld could result in potentially smaller refunds or — in limited instances — a small balance due rather than an expected refund.

To ensure the current withholding is appropriate for an individual’s situation, taxpayers or their preparers should review Publication 919, “How Do I Adjust My Tax Withholding?” or perform a quick check of their withholding using the interactive IRS Withholding Calculator on To adjust the withholding, taxpayers can submit a revised Form W-4, “Employee's Withholding Allowance Certificate” to their employer.

For more information, visit The American Recovery and Reinvestment Act of 2009: Information Center.

After this article appeared, William Cressman, a spokesman for the IRS, clarified a few points for readers who wrote in with questions. He noted that taxpayers do not need to know how much credit they received in their regular paychecks as a result of the reduced withholding. That type of information could be difficult to determine.

“When the credit is calculated on Schedule M and applied to the tax amount the net effect after applying the actual total withholding for wage earners is, in most cases, zero,” he said. “It is not necessary to know what portion of your take-home pay was attributable to the credit. It is sufficient to properly calculate the credit and enter it on the tax return.”

He added that the withholding tables for married and filing jointly wage earners were designed to give the taxpayer slightly less than the maximum $800 credit amount in their paychecks. “All other tax circumstances being equal, from one year to another, MFJ wage earners could be due a slightly higher refund this year simply because of the way the withholding tables were constructed. Self-employed individuals who are not subject to withholding may have already reduced their estimated tax payments to allow for the credit or they may simply be counting on benefiting from the credit on the bottom line of their return.”

Cressman also noted that both wage earners and the self-employed must claim the credit on their tax returns in order for it to be properly considered a credit. “In a sense the credit does not exist until it is claimed on the return,” he said. “If the credit is not claimed on the return, the taxpayer would show a higher tax amount than is actually due and would either get a smaller refund or owe some money. The accurate completion of the tax return and the inclusion of the credit is the method that must be used to arrive at the proper after-credit tax and the proper refund or balance due on the bottom line of the return. However, this does not mean that a statement which suggests that wage earners have already received the credit in their paychecks is wrong. Although withholding is an estimate of the tax that will be due, a reduction in withholding based on the new credit has meant real money in taxpayers' pockets. Since the amount of withholding was reduced in February 2009, wage earners have already received the tangible monetary benefit of the credit in their regular paychecks.”

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