Your salary may not be increasing, but your take-home pay probably is.
That’s the impact of the Making Work Pay tax credit, which is starting to show up in paychecks right about now.
Recent economy-boosting legislation provides for a credit or direct reduction in taxes worth up to $400 for single workers and $800 for married couples filing joint returns.
The impact: Roughly $10 per worker per week in extra take-home pay.
The credit aims to get extra cash into the hands of Americans to prop up consumer spending. Still, not everyone qualifies.
The credit, calculated at 6.2 percent of earned income, will start to phase out for those with modified adjusted gross income above $75,000 (singles) and $150,000 (married couples). It ends completely above $95,000/ $190,000.
The impact on state-tax withholdings is a bit less certain. State withholdings have started to come down, too, but Gov. Jan Brewer on Thursday signed into law emergency legislation raising Arizona’s income-tax withholding percentages so a taxpayer’s state withholding doesn’t change with reduced federal rates.
Here are some questions and answers about the subject:
Question: Must workers do anything to get lower withholding?
Answer: In most cases, no. Changes typically will be handled by employers, at least for those workers who receive a paycheck.
Q: How much more will show up in my paycheck?
A: That depends on factors including your income, filing status, frequency of pay periods and number of withholding allowances you choose.
Q: Do I have to account for these changes when preparing my tax return next year?
A: Credit amounts will need to be calculated on your 2009 income-tax return, the IRS says. If you don’t have taxes withheld by an employer, you can claim the credit then.
Q: Do I need to submit a new Form W-4 to change my withholding amount?
A: No, but it may be smart to file one because the withholding amounts may not be close to the $400/$800 yearly credit maximums.
“The results are varied, to say the least,” said Bob Trinz, senior tax analyst at Thomson Reuters.
The company ran various withholding simulations and found that some workers will see an increase in take-home pay that far exceeds the credit amount, while others will have too much withheld.
In particular, withholding errors may arise for people holding multiple jobs, Trinz said.
People who have too little withheld may face a hefty tax bill next year.
Q: Where can I get more information?
A: IRS Publication 919 has details and a Making Work Pay worksheet. The IRS has a “withholding calculator” at www.irs.gov.
Q: How long will lower withholding apply?
A: The changes apply to tax years 2009 and 2010.
Q: What’s going on with Arizona tax withholdings?
A: Arizona withholdings, at least temporarily, are falling, too. That’s because they’re based on a percentage of federal withholdings.
“Both pieces are going down,” said Anthony Forschino, assistant director of the Arizona Department of Revenue.
However Senate Bill 1185, approved last week and signed by the governor Tuesday, will raise Arizona withholdings roughly back up to where they were before the federal changes took effect, in order to maintain state-tax collections. The state withholding change will take effect May 1.
Because of reductions in federal rates included in the economic stimulus law, Arizona would have lost $73 million in revenue in the fiscal year ending June 30. The state eventually would have gotten the money when tax returns were filed in 2010.
Q: How will Arizona handle paycheck withholdings in the future?
A: One aspect of the new bill will create separate state-withholding tables starting July 1, 2010, said Anthony Forschino, assistant director of the Arizona Department of Revenue. That way, state-tax collections won’t be directly influenced by withholding changes at the federal level.