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Thursday, February 14, 2013

Withholding of Income Taxes and the Making Work Pay Tax Credit

John J. Topoleski
Analyst in Income Security

The Making Work Pay (MWP) tax credit provided a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns in 2009 and 2010. The MWP tax credit expired on December 31, 2010. As a result of the expiration of the MWP tax credit, some taxpayers are finding that the amount of their income tax withholding had increased in 2011. In 2009 and 2010, as a result of the implementation of the MWP tax credit, some taxpayers may have found that their 2009 and 2010 income tax refunds were lower than they anticipated or that they owed taxes when they were expecting a refund. This is because some individuals who were ineligible for the 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 provided a temporary tax credit in 2009 and 2010. Individuals received the MWP credit through lower income tax withholding throughout the 2009 and 2010 tax years. Ineligible taxpayers were not able to claim the tax credit on their 2009 or 2010 income tax filings, resulting in higher tax liability. The change in withholding tables may affect some pensioners’ take-home pay throughout the year, although their 2011 tax liability has not changed. Although the MWP tax credit was not extended, certain other ARRA tax provisions were extended and a 2% reduction in Social Security payroll taxes was implemented for 2011. H.R. 772 would have extended the MWP tax credit for 2011 and would have reduced the amount of the MWP by the amount of the reduction in payroll taxes. P.L. 112-78, signed by President Barack Obama on December 23, 2011, extended the 2% reduction in Social Security payroll taxes through February 29, 2012. The Middle Class Tax Relief and Job Creation Act of 2012 (P.L. 112- 96) extended the 2% reduction through the end of 2012.

This CRS report describes how some taxpayers might have been affected by the implementation and expiration of the MWP tax credit and which taxpayer groups might have had their income tax underwithheld. The report also describes the circumstances in which some workers may have received more under the Making Work Pay tax credit compared with the 2% reduction in Social Security payroll tax.

Date of Report: January 30, 2013
Number of Pages: 14
Order Number: R40969
Price: $29.95

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