Making Work Pay Credit

The Making Work Pay Credit is a refundable tax credit provided by the American Recovery and Reinvestment Act of 2009. The credit is available for 2009 and 2010. A similar credit, the Government Retirees Credit, was available for 2009 only.

Here are some factors that determine eligibility:

If you earned income as an employee or were self-employed, you're probably eligible for the Making Work Pay Credit. This refundable credit is worth up to $400 per person ($800 for a married couple filing jointly).
If you did not have earned income from wages or self-employment, as with many who are retired or disabled, you may have received a U.S. Treasury economic stimulus payment of $250 in 2010.

It is possible to receive both the Making Work Pay Credit and the economic stimulus payment, but the total amount cannot exceed $400 per person.

Making Work Pay Credit

The credit equals 6.2% of your earned income, with a maximum of $400. Married couples filing jointly receive $800, even if only one spouse works. You're eligible for the credit if:

You are not claimed as a dependent by another taxpayer.
You are not a nonresident alien and have a valid Social Security Number.
You received earned income. The maximum credit is reached at $6,451 in earned income ($12,903 for married filing joint). The credit is reduced when modified adjusted gross income reaches $75,000 for an individual taxpayer ($150,000 if married filing joint), and phases out completely at a MAGI of $95,000 ($190,000 if married filing joint).

Wage earners received the credit through reduced withholdings on their paychecks. The self-employed could choose to receive the credit's funds early by reducing self-employment tax payments. To avoid underpayment penalty on estimated taxes, however, it may be safest to wait until you file your return to claim the credit.

Although you may have received the funds from the credit early, you still have to claim the credit on your return. Doing so ensures that the funds from the credit are counted as payment toward your tax liability. This lowers your tax due or increases your refund compared to what it would have been without the credit. If you don't claim the credit on your return, you'll have a higher tax liability, and would essentially be giving the credit back.

How you claim the credit depends on the return form you file:

If you file Form 1040EZ, fill out the worksheet accompanying the form.
If you file Form 1040 or 1040A, complete Schedule M.

For more information, see Instructions for Form 1040EZ or Instructions for Schedule M.

Economic Stimulus Payments

The economic stimulus payments were targeted at those who are ineligible for the Making Work Pay Credit because they have no earned income. In order to receive the $250 payment, you must have received Social Security, Supplemental Security Income (SSI), railroad retirement or veterans benefits in November or December, 2008 or January, 2009. Most eligible recipients automatically received the payment in 2009, but some may not have received it until 2010.

If you received a stimulus payment and the Making Work Pay Credit, the amount of Making Work Pay Credit that you're eligible for will be reduced by the $250 stimulus payment. The adjustment is figured on either the 1040EZ worksheet or Schedule M, depending on which return form you're using.

Effects on Withholding

Certain situations reduce or eliminate your eligibility for the Making Work Pay Credit, even though you received the credit amount through reduced withholding. After completing the 1040EZ worksheet or Schedule M, if some or all of the credit is disallowed, your tax liability will be higher, meaning you'll owe more tax or receive a lower refund. Particularly affected are:

Taxpayers with more than one job
Married couples with two incomes
Dependents with earned income
Recipients of Social Security and similar benefits who also have earned income