So now that you’ve calculated the Making Work Pay Credit, what does it all mean?
A credit is a dollar for dollar reduction in your tax bill. So if you owed $1000 and the credit was $400, your tax bill is now $600. The tax rates didn’t change. The tax due didn’t 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. If everyone did their math right 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 and the credit now acts as a “payment” in the amount of $400 (or $800 if married filing jointly). So you paid in less, 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 owe tax because too little was taken out of your paycheck during 2009, you may qualify for special relief if the result is a penalty. The IRS will waive an estimated tax penalty that applies if it relates to the Making Work Pay Credit. If you receive an estimated tax penalty notice from the IRS, you can request a waiver using form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (downloads as a pdf).
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.
So hopefully that cleared up some of the confusion. If you have special circumstances, I highly recommend that you check with your tax pro.
But the bottom line is that, to qualify for the credit, you must file Schedule M. You’re not double dipping (despite some of the explanations that I’ve seen) – it’s a requisite for the credit. 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.