Broker Check

The Elimination of the Making Work Pay Tax Credit

Howard Hook, CFP®, CPA, quoted in The Star-Ledger's business/finance column, "Biz Brain" on February 20, 2012

Question:  I was just informed by the IRS that the Making Work Pay Tax Credit, Schedule M, is no longer available. I am wondering why and also who’s responsible for its elimination? And is there anything I can do to improve my taxes? – Sparta Senior

Answer:  The Making Work Pay Tax Credit was part of the American Recovery and Reinvestment Act of 2009. It provided a refundable tax credit of $400 for individuals and $800 to married taxpayers with adjusted gross income under certain thresholds. The credit was for tax years 2009 and 2010 and expired at the end of 2010.

“Credits such as the Making Work Pay Credit are intended to provide short term stimulus for the economy through either reduced payroll withholding or rebate checks when filing your tax return,” said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton. “They typically are not intended to be permanent.”

He said in 2011, Congress created a credit to replace the Making Work Pay Credit, which for many individuals was more than twice the Making Work Pay Credit. This was a one-year reduction in the Social Security tax paid by employees (from 6.2 percent to 4.2 percent). Hook said this 2 percent reduction in the payroll tax would have exceeded the $400 Making Work Pay Credit for a taxpayer earning $20,000 or greater.

As for who is responsible for the elimination of the Making Work Pay Credit, it depends on how cynical you are about these things and what side of the political aisle you are on, Hook said. “An argument can be made that no one is to blame since it was never intended to go beyond 2010,” he said. “If you are more cynical you can blame Congress for failing to extend the credit.”

What else can you do? That depends on your personal tax situation. Some often overlooked general strategies to consider include non-cash donations to charities, realizing capital losses from investment accounts to offset realized gains, making tax-deductible IRA contributions if you’re eligible, and deducting part of long-term care insurance premiums as an itemized deduction, Hook said.

The Making Work Pay credit, along with other credits, were designed to spur the economy, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. Kiely said some credits are staying, such as the credit for child and dependent care expenses, the Lifetime Learning Credit, retirement savings contributions credits and the child tax credit.