Your next paycheck will probably be a little fatter than usual, but it’s not because your boss thinks you’re swell. Instead, the increase reflects the Making Work Pay credit, part of the economic stimulus package enacted this year.
Most taxpayers will receive a credit of about $400, or $800 for married couples. Unlike last year, you won’t receive a check in the mail. Instead, the credit will be spread out over the year. Most taxpayers will receive an extra $10 a week.
That’s not exactly a windfall, but a little something extra in your paycheck sure can’t hurt, right? Well, actually, it could. Some taxpayers could end up with a smaller-than-average tax refund next year or – horrors – discover they owe the IRS money. You can avoid problems down the road by adjusting the withholding allowances on your W-4. Consider reviewing the number of allowances you claim if:
• You’re a dual-income couple. The IRS withholding tables are designed to provide a maximum tax credit of about $400 for single taxpayers, and about $600 if you are married and file jointly, says Bob Trinz, senior tax analyst for Thomson Reuters. That could cause some working couples to receive a larger combined credit than allowed by law.
For example, suppose you earn $75,000 a year, as does your spouse. Both of you claim two withholding allowances. You’ll each get a $614 credit, for a combined credit of $1,228, according to Thomson Reuters. However, the maximum credit a married couple is eligible to claim is $800. Unless one or both of you increase the amount of taxes withheld from your paychecks, you could end up owing the IRS money when you file your taxes next year, Trinz says.
Conversely, Trinz says, if only one spouse works, the couple could end up with a smaller credit than they’re entitled to. Here’s an example, from Thomson Reuters: A married man earns $100,000 a year and claims four withholding allowances. His wife is a homemaker. He’ll receive a credit of $614, even though the couple are entitled to an $800 credit. This couple can claim the balance of the credit when they file their taxes, or they can get the money sooner by reducing their withholding.
• You have more than one job. If you’re working two jobs, both of your employers will adjust your take-home pay to reflect the new credit. The combined credit from both jobs could exceed the maximum $400 credit for individual taxpayers, says Michael O’Toole, director of government relations for the American Payroll Association.
• Your total income exceeds the thresholds for the credit. The Making Work Pay Credit phases out for single taxpayers with modified adjusted gross incomes of more than $75,000, and married couples with modified AGI of more than $150,000. Singles with modified AGI of more than $95,000 and couples with MAGI of more than $190,000 are ineligible for the credit.
Your employer will base the withholding calculation on the amount of income from your job. But if you have other sources of income – from a second job, for example – your total income could “bump you out of the range to be eligible for the full credit,” says Amy McAnarney, director of H&R Block’s Tax Institute.
Likewise, some dual-income couples could run into problems if one spouse receives the credit but the couple’s combined income exceeds the income cutoff.
Reviewing your W-4
Even if you have no tax-credit worries, take a look at your W-4 anyway. Tax preparers recommend reviewing the number of allowances you claim on your W-4 whenever you have a major life change, such as the birth of a child, marriage or a home purchase. But a recent survey by H&R Block found that 44 percent of workers haven’t adjusted their W-4s in at least three years.
If you had to write a big check to the IRS this year, that’s a sign that you’re not having enough withheld and need to reduce the number of allowances on your W-4. Likewise, taxpayers who receive a large refund should consider increasing the number of allowances they claim.
Many taxpayers resist this idea because they like receiving a check from the IRS. But in these economically challenging times, giving the government an interest-free loan makes no sense, says David Bergstein, a tax analyst for CCH CompleteTax, an online tax software program. When you file your taxes, he says, “You should break even.”
There are several Internet calculators to figure out how many allowances you should claim. CCH offers one at completetax.com/calc.asp.