Making Work Pay Tax Credit Snares 13.4 Million Taxpayers

Making Work Pay Tax Credit Snares 13.4 Million Taxpayers

TSCL Wants to Know: Did You Wind Up Owing Uncle Sam? 

More headaches are on the way this tax season.  For the second year in a row, the Making Work Pay Tax Credit didn’t work as planned for an estimated 13.4 million taxpayers, according to the Treasury Department’s Inspector General.  Seniors are high on the “Most Negatively Affected List,” and may wind up owing taxes and even a penalty.

The tax credit, a provision of the 2009 stimulus legislation, was advanced to taxpayers in 2009 and 2010 through higher pay and pension checks by a decrease in federal income tax withholdings.  Most eligible people qualified for a credit of up to $400 (individual) or $800 (joint).  But millions of taxpayers through no fault of their own were advanced more of the Making Work Pay Tax Credit than they were entitled to.

One glitch that trapped working seniors during the 2010 tax season involved the $250 economic stimulus payment beneficiaries received if they were getting Social Security, Supplemental Security Income (SSI), railroad retirement or veterans’ disability compensation.  The $250 payment reduced the Making Work Pay Tax Credit that working seniors could claim to a maximum of $150 (individual) or $300 (joint).  The IRS withholding tables that employers used in 2009 and 2010, however, did not adjust for those payments.  Compounding the problems for seniors, the problematic IRS withholding tables also allowed reduced withholdings for pensions — even though pension income was not even eligible for the credit.

Because a high percentage of taxpayers were affected by under-withholdings due to the problematic tax tables, the IRS allowed a waiver of penalties for both 2009 and 2010 tax years.  But taxpayers have to request the waiver of penalties in order to receive it.  According to the Treasury Inspector General, last year virtually no taxpayer surveyed knew they could request a waiver.

To be eligible for the Making Work Pay Tax Credit, individuals must have earned income from a job, be within income limits that apply to the credit, and have a valid Social Security number.  Although the money was advanced in higher pay (and pension checks), taxpayers must figure the credit on Schedule M and attach it to a Form 1040 or 1040A in order to claim it.  Taxpayers filing a 1040 EZ may figure the credit on the worksheet attached to the return.

  • People most at risk of owing taxes include:
  • Single taxpayers with more than one job.
  • Joint filers in households where both spouses work or where one or both spouses have more than one job.
  • Taxpayers who receive pension payments.
  • Taxpayers who are employed and receive Social Security, or similar retirement benefits.

What should you do?  If you still use paper tax returns, don’t wait for the forms and instructions to show up in your mailbox.  The IRS did not send any out this year.  Visit the IRS website at for forms, instructions, and to file online.  Free tax assistance services may be available in your area, or call your local IRS taxpayer assistance office.

Did you wind up owing federal income tax last year or this tax season due to the effects of the Making Work Pay Tax Credit?  TSCL is concerned that senior taxpayers were disproportionately affected by implementation problems of the Making Work Pay Tax Credit, and is conducting an online to survey to learn how they were affected.

Sources:  Making Work Pay Credit Was Implemented As Intended, But Resulted in Many Taxpayers Owing Taxes With Returns,” Treasury Inspector General For Tax Administration, November 1, 2010, Ref. No. 2011-41-002.