So now that you’ve calculated the Making Work Pay Credit for the 2010 tax year, what does it all mean?
It’s important to understand what a tax credit is exactly to figure out how it applies to you. A credit is a dollar for dollar reduction in your tax bill (as opposed to deductions which reduce your taxable income). For example, if you owed $1000 and the credit was $400, your tax bill is now $600. This means that the credit reduces your total tax bill at the end. The tax rates didn’t actually change: the credit just acts like an extra payment on your tax return.
With the adjusted withholding tables, your withholding throughout the year was less than normal so that you got more money in your pocket each pay period. That means that if the government normally withheld, for example, $23 from each paycheck in 2008, they withheld only $16 from each paycheck in 2010 (remember that the credit still applied in 2009). Your employer used updated tax tables from the IRS to figure the new withholding amounts. Again, remember that the tax rates didn’t change, just the amount taken out of your check.
If everybody’s math was correct and you were entitled to the full credit, you should end up with no difference. This is because you paid in $400 (or $800 if married filing jointly) less during the year in withholding and the credit now acts as a “payment” in the amount of $400 (or $800 if married filing jointly). So you paid in less during the year, but you got a credit, even Steven.
If you didn’t qualify for the credit, but your withholding was adjusted anyway (remember, your employer doesn’t know if you qualify or not), you’ll have to make up the difference when you file your taxes. This is because you paid in less but don’t have the credit to offset the lesser withholding.
If you qualified for the credit but the withholding wasn’t adjusted enough, you’ll have paid in more than expected and you are entitled to the credit. That should mean, barring any other special circumstances, a refund.
If you’re self-employed and didn’t have any withholding during the year, you’re still entitled to the credit if you otherwise qualify. You just aren’t offsetting any withholding. So long as you qualify, you’ll get the entire amount of the credit to apply towards your tax due.
To claim the credit, you must calculate the amount due by filing Schedule M if you file a form 1040 or 1040A (if you file a form 1040-EZ, you’ll use the worksheet on the back). You’re not double dipping or claiming the credit twice by filling out the schedule – remember, you didn’t get the credit during the year, you only had an adjustment to your withholding. If you don’t file Schedule M, you won’t receive the credit.
Make sense?Want more taxgirl goodness? Pick your poison: You can receive posts by email, follow me on twitter (@taxgirl) hang out with me on Facebook and check out my YouTube channel.