Here comes your stimulus bonus
Employers should be ready for the Making Work Pay credit by Wednesday. That means some extra take-home pay. Here's what you need to know.
NEW YORK (CNNMoney.com) -- You're likely to see some more green in the next couple of weeks. Not only on the trees. Very possibly in your wallet, too.
President Obama has asked that all employers adjust their payroll systems by Wednesday so eligible workers can start receiving the new Making Work Pay tax credit through their paychecks. The credit, available for 2009 and 2010, was a part of the economic recovery package lawmakers passed in February.
Just how much extra cash you will see depends on your marital status, your salary and how many allowances -- or exemptions -- you normally take.
As a rough guide, singles eligible for the credit might get between $10 to $15 per paycheck if paid weekly; for those married filing jointly, they're likely to see an extra $15 to $20.
The credit is available to those with earned income. It's worth up to $400 a year for single filers and $800 for joint filers.
The full credit will be paid to people with modified adjusted gross incomes of $75,000 or less ($150,000 per couple). A partial credit would be paid to those making above those amounts but no more than $95,000 ($190,000 for couples).
What is modified adjusted gross income? It's your adjusted gross income but with some exclusions added back in. In the case of this credit, the only exclusion that would need to be added back is any income earned in a foreign country, in Puerto Rico or in American Somoa.
"For most people, their modified adjusted gross income will be the same as their adjusted gross income, which is on the bottom of the front page of their return," said enrolled agent David Mellem of Ashwaubenon Tax Professionals, who is certified to represent taxpayers before the IRS.
The credit is also refundable, which means that even very low-income families who don't make enough to owe income tax would be able to claim it.
Even if someone works, he won't qualify for the Making Work Pay credit if he is claimed as a dependent on someone else's tax return.
Also, adults who are eligible for Social Security, Railroad Retirement, veteran's compensation or pension benefits will not receive the credit. But if they were eligible for those benefits sometime between November 2008 and January 2009, they will receive a one-time, $250 emergency payment no later than mid-June.
That emergency payment is not subject to income tax, Mellem said.
Using new withholding tables from the IRS, employers are supposed to pay out the Making Work Pay credit by reducing how much tax is withheld from eligible workers' paychecks.
"Changing withholding tables is a routine task. It's not difficult," said Scott Mezistrano, senior manager of government relations at the American Payroll Association.
In fact, many employers likely have already done so, said Pete Isberg, the head of the National Payroll Reporting Consortium. That means their employees should already have started to see more cash in their paychecks.
For example, Ron Moser, a human resources director for a school district in western New York, said his district included the credit in paychecks starting in early March.
Lower-income workers may not make enough money to have taxes withheld once their exemptions are taken into account. So they won't see any extra cash in their paychecks. But they may claim their full credit when they file their 2009 tax returns next year.
Possibly. Some people could end up getting a larger credit than they're entitled to. That means they'd have to pay back the excess amount when they file their 2009 taxes -- or, if they're getting a refund, their refund would be reduced by the amount they were overpaid.
If that situation is unappealing, a tax filer could act now to reduce the number of withholding allowances he takes on his W4 at work. The fewer allowances he takes, the more tax that is withheld.
The IRS has a calculator online that you can use to figure out how many allowances you should take if you're eligible to receive the credit and don't want to be overpaid -- or to put it another way, don't want to have too little tax withheld.
Those most likely to be overpaid are:
Anyone who holds more than one job. You will get paid the Making Work Pay Credit twice, up to $400 ($800 for a joint filer) from your first employer and up to $400 ($800 for a joint filer) from your second employer.
Joint filers whose spouses work. Each spouse will end up being paid the credit for married couples by each of their employers.
There's a twist, too. Because of the way the withholding tables were set up, each working spouse may be paid up to $600 this year -- instead of up to the $800, Mezistrano said.
In other words, the husband would receive $600 at his job and the wife $600 at her job, for a total of $1,200. Since they're only entitled to $800 total as a couple, that means they would have to pay $400 back to the IRS -- or see their refund reduced by that amount.
Anyone who receives income from a rental property or investment, such as interest and dividends. Your employer only knows about the income you earn at the company. If you receive other income that increases your modified adjusted gross income -- or even pushes you past the income limits for the credit -- you may end up owing the IRS some or all of the credit you received in your paycheck.
Anyone who started receiving their credit at the end of Febuary or anytime in March. The withholding tables are structured so that payments starting in April will add up to $400 for single filers and $800 for joint filers by year end. If payments start sooner than that a tax filer may actually receive a bit more than he's due by Dec. 31.
Conversely, if your employer doesn't start your payments until the end of April or in May -- there's no penalty if an employer doesn't meet the April 1 deadline -- you may end up getting a little less of a credit than you're entitled to, in which case you can claim the rest when you file your 2009 tax return.