What Were the Making Work Pay Credits?
Understand the historical Making Work Pay tax credit, a 2009-2010 stimulus that functioned by adjusting tax withholding in employee paychecks.
The Making Work Pay credit was a temporary, refundable tax credit from the American Recovery and Reinvestment Act of 2009. Available for the 2009 and 2010 tax years, the credit has since expired and cannot be claimed on current returns. It provided a direct reduction in tax liability to increase take-home pay. Because the credit was refundable, individuals could receive it even if they owed no federal income tax.
Eligibility Requirements
To qualify for the Making Work Pay credit, an individual needed to have earned income during the 2009 or 2010 tax year. Earned income for this purpose included wages, salaries, tips, and net earnings from self-employment. Income from sources like investments or pensions did not count toward this requirement.
The amount of the credit was subject to phase-out limitations based on Adjusted Gross Income (AGI). Certain individuals were specifically excluded from claiming the credit. Nonresident aliens were not eligible, and neither was an individual who could be claimed as a dependent on another person’s tax return.
Calculating the Credit Amount
The maximum credit amount was $400 for an individual and $800 for a married couple filing a joint tax return. The actual credit was calculated as 6.2% of an individual’s earned income, up to these maximums. For example, a single person with $5,000 of earned income would calculate a credit of $310, while someone with $10,000 of earned income would reach the $400 maximum.
The credit began to phase out for taxpayers with a Modified Adjusted Gross Income (MAGI) exceeding certain thresholds. For single filers, the phase-out began at a MAGI of $75,000, and for married couples filing jointly, it started at $150,000. The credit was reduced by 2% of the income above these levels and was completely eliminated for single filers with a MAGI of $95,000 or more and for joint filers with a MAGI of $190,000 or more.
Receiving and Reconciling the Credit
For most working individuals, the credit was not received as a lump sum when filing taxes. Instead, it was advanced to them throughout the year via reduced federal income tax withholding in their paychecks. Employers used updated IRS withholding tables to automatically take out less tax, thereby increasing employees’ net pay.
For individuals who did not have taxes withheld, such as certain government retirees or self-employed individuals, the credit was handled differently. Some received a one-time payment, while self-employed workers claimed the credit directly on their annual tax return.
When filing their tax returns for 2009 and 2010, taxpayers had to reconcile the credit using Schedule M. On this form, they would compare the amount of the credit they were eligible for with the amount they had already received. If the calculated credit was more than what was received, they could claim the remaining amount. Conversely, if a taxpayer received more than they were eligible for, they had to repay the excess, which could reduce their refund or result in a balance due.