Calculating the Making Work Pay Credit (2011)

There have been few changes in the Making Work Pay Credit since last year (look for my post later today summarizing what you need to know). Those changes are, however, enough to throw taxpayers, so I’ve updated what you need to know to calculate the credit.

As it was last year, if you were paid a wage or salary by an employer, you saw a little more in your paycheck in 2010 than in 2008 as a result of the Making Work Pay tax credit. If you didn’t make a change on your form W-4 last year, your employer withheld a little less over the year – the amount works out to about $7.69/week for individual taxpayers (that was a bit less per week than in 2009 since the credit kicked in later that year). The credit will provide up to $400 per individual worker and $800 per working married couple.

The amount of the credit will be figured on your 2010 income tax return. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their tax returns. You’ll claim or report the credit on line 63 of your federal form 1040:

1040-payments.jpg

To claim the credit, you need to complete Schedule M. You need to complete Schedule M even if your withholding was adjusted by your employer or if you are self-employed.

I’ll walk you through the form, step by step.

If you are a nonresident (and are filing a federal form 1040NR) or can be claimed as someone else’s dependent, skip through to line 8. You are not eligible for the making work pay credit but you might be eligible for other credits. Similarly, if you do not work, you are not eligible for the credit.

Line 1a: If you (and your spouse if married filing jointly) earned wages of at least $6,451 ($12,903 if married filing jointly), check yes and skip ahead to line 3. If you checked no, enter the amount of your earned income (meaning wages or salary) on line 1a. Do not include unearned income such as interest or dividends.

Line 2: Multiply the number on line 1a by 6.2% – that’s the percentage used to calculate the credit for those who checked no (again, if you checked yes, move along).

Line 3: If you checked no, enter $400 if single or $800 if you’re married filing jointly – this is the maximum credit allowed. The maximum credit of $800 for married taxpayers applies even if only one taxpayer worked.

Line 4: If you checked yes at line 1a, enter $400 ($800 if married filing jointly) on this line – this is the maximum credit allowed. If you checked no at line 1a, enter the smaller of line 2 or line 3.

Line 5: Enter your AGI. You’ll find it online 38 on your form 1040.

Line 6: Enter $75,000 ($150,000 if married filing jointly). The credit will phase out at a rate of 2% of income over these amounts. The result is that single taxpayers with income above $95,000 and those married filing jointly with income above $190,000 will not get the credit.

Line 7: If the amount on line 5 (your AGI) is more than the amount on line 6 (the phaseout amounts), check “yes” and calculate the overage. Subtract line 5 from line 6 and enter that amount on line 7.

If you check “no”, skip to line 9.

Line 8: If you entered an amount on line 7 (meaning that you checked “yes”), multiply that amount by 2% – that’s the magic percentage for phaseouts. Enter that amount on line 8.

Line 9: If you have an amount on line 8, subtract it from line 4 – this figures your maximum credit. If the result 0 or less, enter 0 (this means that you aren’t entitled to the credit). If you don’t have an amount on lines 7 or 8, enter the amount from line 4 on line 9.

Line 10: If you were entitled to an economic recovery payment because you were retired or disabled, or if you were entitled to the Special Credit for Certain Government Retirees, you’ll figure those amounts here. If you check “no” here, move onto Line 11. If you check “yes” you can’t claim the full Making Work Pay Credit and the special credits. So, enter the amount you received from ERP here.

Line 11: Subtract the amount on line 10 (if any) from Line 9. THIS is the amount of your credit. Enter it on line 63 of your form 1040 (or line 40 of the form 1040A), as shown here:

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So now that you’ve calculated your credit… what next? Check out my posts later today to see what it all means.