Making Work Pay confusion

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With just three days left to the annual tax-filing deadline, people are still having problems with the Making Work Pay credit.

Take this question from a Bankrate reader: “If you already filed your 2009 taxes, do you have to file additional paperwork to get the credit or is it automatically sent out?”

First, let me dispense with the “automatically sent out” portion. Thanks to prior rebates, we taxpayers have gotten used to getting extra checks from Uncle Sam in connection with tax law changes. For most Making Work Pay credit folks, that’s not the case.

Only the eligible retirees who got $250 checks last year received the money that way. The rest of the job-holding recipients got the credit in small amounts each paycheck via reduced payroll withholding.

But having less taken out of your check is not the same as claiming the actual Making Work Pay credit, which for folks who last year didn’t make more than $95,000 (or $190,000 if you’re married and file jointly) could be up to $400 (or  up to $800 if married filing jointly).

To actually get the credit now, you have to file Schedule M with your return.

Still confused? Welcome to the world of U.S. taxes!

Essentially what the IRS wants via this new form is to double-check that people get the correct credit amount due them. The problem is that in some cases, people got more credit than they should have. This could be the case for someone who held multiple jobs or who could be claimed as a dependent on someone else’s tax return. In such instances, the Schedule M will account for the over payments.

And for folks who are eligible for the full amount, Schedule M will help them determine whether they received the maximum possible credit in their paycheck or are due more money when they file their returns.

For most folks who made under the thresholds and had their withholding reduced last year, there’s no problem. The credit amount plus your reduced withholding amount on your W-2 will be added together (along with any other credits for you might be eligible) in the “payments” section of your 1040 or 1040A to cover your tax bill.

If all of these amounts are more than your tax bill, you’ll get a refund. But if you didn’t claim the credit, that money won’t be counted, so you’re shorting yourself.

Where people didn’t file Schedule M because they didn’t realize they needed to, the IRS has been taking care of it during processing. That’s very nice of the tax agency, although it means that it slows the whole filing process down, making refunds a little later going out than they normally would.

Finally, here are a couple of quick notes about specific filers and tax returns and the credit.

I referred to Form 1040 or 1040A, but if you file Form 1040-EZ, you need to use the worksheet for Line 8 on the back of that return, not Schedule M, to figure the Making Work Pay credit.

And if you’re a retiree who received a $250 check from the Social Security Administration or other pension-paying federal agency and you make enough in retirement to require you file a return, you also need to fill out Schedule M.

As for this particular Bankrate reader’s situation, I recommend that he (or she or you if you’re in the same boat) wait until you get your refund from the IRS. If the amount you receive is more than you thought you were getting, it’s probably because of the Making Work Pay credit that the IRS figured for you.

If it’s less, that also is probably because of the credit. In either case, the IRS should also send you a notice as to why your refund is different from what you expected.

And if your refund is exactly the same as what you figured on your return without Schedule M, I’d run the tax numbers again but with the Schedule M this time just to be sure. If that recalculation gives you more money, then you can file an amended return using Form 1040X.

You can find out more about this tax break in Bankrate’s tax tip Claiming the Making Work Pay credit.