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Underwithholding of Income Taxes and the
Making Work Pay Tax Credit
John J. Topoleski
Analyst in Income Security
January 19, 2010
Congressional Research Service
7-5700
www.crs.gov
R40969
CRS Report for Congress
P
repared for Members and Committees of Congress
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Underwithholding of Income Taxes and the Making Work Pay Tax Credit
Summary
Some taxpayers may find that their 2009 income tax refunds are lower than they anticipated or
that they owe taxes when they expected a refund. This is because some individuals who were
ineligible for the Making Work Pay (MWP) tax credit nonetheless received it. The MWP credit
was implemented as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L.
111-5) and will provide a temporary tax credit in 2009 and 2010. Individuals received the MWP
credit through lower income tax withholding throughout the 2009 tax year. Ineligible taxpayers
will not be able to claim the tax credit on their 2009 income tax filings, resulting in higher tax
liability.
This CRS report describes how some taxpayers might be affected and which taxpayer groups
might have had their income tax underwithheld. This report will be updated as circumstances
warrant.
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Underwithholding of Income Taxes and the Making Work Pay Tax Credit
Contents
Eligibility for the Making Work Pay Credit ................................................................................. 1
Implementing the Making Work Pay Credit Through Income Tax Withholding............................ 1
Groups Ineligible for but Received the Credit.............................................................................. 2
Contacts
Author Contact Information ........................................................................................................ 3
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Underwithholding of Income Taxes and the Making Work Pay Tax Credit
s a result of the implementation of the Making Work Pay (MWP) tax credit in the
American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5), some taxpayers
A may unexpectedly find that their 2009 income tax refunds are lower than anticipated or
that they owe income tax instead of receiving a refund. Some taxpayers ineligible for the MWP
credit have been receiving the credit but will not be able to claim it when filing their 2009 income
tax returns. The IRS has also published an optional procedure for adjusting withholding for those
making pension payments in 2010. Some pensioners may find that their 2010 take-home pay is
different compared with the 2009 amounts.
Eligibility for the Making Work Pay Credit
Under the MWP credit, eligible taxpayers could receive up to $400 for individuals or $800 for
joint returns in 2009 and 2010. To qualify for the MWP credit, individuals must have earned
income and have a valid Social Security number. The MWP credit is phased out for individuals
making more than $75,000 of modified adjusted gross income ($150,000 for a joint return).1 For
the purposes of the MWP credit, ARRA used the definition of earned income in 26 U.S.C.
32(c)(2), which include wages, salaries, tips, and other compensation from work, but does not
include pension income. Individuals who received income only from pensions would not be
eligible for the MWP credit. In addition, noncitizens who do not have valid Social Security
numbers are ineligible for the tax credit. (Noncitizens might have Individual Taxpayer
Identification Numbers to comply with U.S. tax laws.)
Implementing the Making Work Pay Credit
Through Income Tax Withholding
The MWP credit reduces the amount of income tax withheld from individuals’ checks, resulting
in higher take-home pay. On February 21, 2009, the IRS issued revised income tax withholding
tables.2 All individuals subject to income tax withholding, including those individuals who were
not eligible for the tax credit, were subject to the revised withholding tables.3 Taxpayers not
eligible for the credit will not be able to claim the credit on their 2009 tax return. If these
taxpayers were advanced the credit, then they may find that their taxes were underwithheld at the
end of the tax year. In calculating their 2009 income taxes, these taxpayers may find their refunds
1 The ARRA also provided for refundable $250 tax credits for individuals eligible to receive Social Security, railroad
retirement, veterans compensation, veterans pensions, Supplemental Security Income (SSI) benefits, and certain
government retirees. However, these individuals are not subject to income tax withholding.
2 See IR-2009-13, “New Withholding Tables Now Available on IRS.gov; Most Workers Will See Bigger Paychecks
this Spring,” February 21, 2009, available at http://www.irs.gov/newsroom/article/0,,id=204521,00.html; and IRS
Publication 15-T, New Wage Withholding and Advance Earned Income Credit Payment Tables, Revised March 2009,
available at http://www.irs.gov/pub/irs-pdf/p15t.pdf.
3 The Department of Treasury and the IRS stated that the reason for using a single table for pension fund administrators
and employers is that the Internal Revenue Code requires that “[T]he payor of any periodic payment … shall withhold
from such payment the amount which would be required to be withheld from such payment if such payment were a
payment of wages by an employer to an employee for the appropriate payroll period” (see 26 U.S.C. 3405(a)(1)). For
information, see Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With the
Making Work Pay Credit, November 4, 2009, reference number 2010-41-002, by the Treasury Inspector General for
Tax Administration, available at http://www.treas.gov/tigta/auditreports/2010reports/201041002fr.pdf.
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Underwithholding of Income Taxes and the Making Work Pay Tax Credit
to be lower than they expected or that they may owe taxes. For example, an individual who
receives income entirely from a pension, normally receives a $200 refund, and who received the
entire $400 MWP credit could find a tax liability of $200 for the 2009 tax year. However, because
more than three-quarters of households receive income tax refunds, most affected households
would likely see a reduction in their refunds rather than owing tax.4
On May 14, 2009, the IRS issued Notice 1036-P, Additional Withholding for Pensions for 2009,
which is an optional withholding schedule for those making pension plan payments. This optional
withholding schedule is designed to offset the underwithholding that might have occurred.
However, there may be pension plans that did not adopt this withholding table. Pension plans
were not required to use the revised withholding tables. Some continued to use the withholding
table issued on February 21, 2009. For 2010, IRS Publication 15, (Circular E) Employer’s Tax
Guide, contains a method for calculating additional withholding amounts for pension payments.
Some individuals who receive pensions may see their withholding amounts (and hence their take-
home pay) increase or decrease in 2010 compared with their amounts in 2009.
Groups Ineligible for but Received the Credit
The Treasury Inspector General for Tax Administration issued a report on November 4, 2009.5
The report estimated that 15.4 million taxpayers could be affected and has identified the groups
most likely to be:
• Dependents who receive wages—Dependents are ineligible for the MWP credit.
• Single taxpayers with more than one job and joint filers where one or both
spouses have more than one job or both spouses work—Individuals who work
multiple jobs in 2009 might have had the $400 MWP advanced to them at each
job.
• Individuals who file a tax return with an Individual Taxpayer Identification
Number—Individuals must have valid Social Security Numbers to claim the
MWP credit.
• Taxpayers who receive pension payments—Only taxpayers who have earned
income are eligible for the MWP credit. Pension income is not classified as
earned income.
• Social Security recipients who also receive wages—Section 2201 of the ARRA
provides for Social Security recipients to receive a one-time payment of $250.
The MWP credit is reduced by the amount of any payments under Sections 2201
or 2202 of the ARRA. Individuals who are advanced the $400 MWP credit and
also receive the Social Security economic recovery payment have to repay the
excess received.
4 The IRS Statistics of Income indicated that 79.4% of tax returns received a refund in 2006 and that the average refund
was $2,691. The data is available on the Statistics of Income Tax Stats page at http://www.irs.gov/taxstats/indtaxstats/
article/0,,id=133414,00.html.
5 Treasury Inspector General for Tax Administration, Millions of Taxpayers May Be Negatively Affected by the
Reduced Withholding Associated With the Making Work Pay Credit, November 4, 2009, reference number 2010-41-
002, available at http://www.treas.gov/tigta/auditreports/2010reports/201041002fr.pdf.
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Underwithholding of Income Taxes and the Making Work Pay Tax Credit
The IRS’s response included in the Inspector General’s report indicated that the IRS has been
engaging in outreach efforts to increase awareness of the Making Work Pay Credit.6 The IRS has
also indicated that it will alert taxpayers that they may request a waiver from the penalty for
estimated taxes. The estimated tax penalty applies to individuals who fail to have a sufficient
amount of income tax withheld throughout the year.
Author Contact Information
John J. Topoleski
Analyst in Income Security
jtopoleski@crs.loc.gov, 7-2290
6 An example can be found on the IRS You Tube channel, available at http://www.youtube.com/watch?v=
qzdIElXDqhg.
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