Millions of Americans now receiving their $10.25 individual weekly windfall from President Obama‘s “Making Work Pay” tax credit may be in for a disagreeable surprise next spring.

The government may want some of that money back.

The tax credit is supposed to provide up to $400 to individuals and up to $800 to married couples as part of the economic recovery act voted into law last February.  Workers began receiving the tax credit in paychecks they received after April 1, when employers were required to implement the new tax tables.

Revised withholding tables issued by the IRS extract less from individual paychecks for the tax credit.  The $10.25 individual weekly rate is based on the 39 remaining weeks in 2009.  It’s a simple change, for people who have one job.

There are, however, circumstances that will cause millions of taxpayers to get much more spendable cash than they are entitled to, and Uncle Sam will want this extra funding repaid at tax time.

The IRS is aware of the problems the tax tables will cause many consumers, but is keeping quiet.  I suppose the IRS is hoping many of the over-receivers will be expecting a refund, and will not complain because their refund will be smaller.  The average refund was just below $2,700 for 2008 income.

Taxpayers who plan their withholding close to their expected obligation might be in for a surprise. 

The revised tax tables credit workers with 6.2 percent of their earned income, up to a $400 maximum for individuals and up to $800 for married couples filing jointly.  Ineligible are individuals grossing over $95,000 and couples taking in more than $190,000.

The tax credit was designed specifically to help boost the economy by collecting less from workers and thereby giving more money to consumers. 

In his appraisal of his first 100 days in office, President Obama praised the tax credit as one of his achievements, promoting that 95 percent of working families will qualify for it in the next two years.

The tax tables don’t take into account several common categories of taxpayers:

• A worker with two jobs will receive a potential $400 increase in the take-home pay at each job, up to $800, but is only eligible for a maximum credit of $400. The excess must be repaid at tax filing time, either through a smaller refund or paying in cash.
• Married couples filing jointly are eligible for an $800 credit. If both spouses work, the new withholding tables give them each $600 (total $1200), and the excess $400 must be repaid. The IRS recognized the problem and adjusted the withholding tables, but the fix was imperfect.

Note: Fifty-five percent (33 million) of married couples have both spouses working for a paycheck.

• A college student with a job making $10,000 will receive $400 that must be returned if the student is listed as a dependent on their parent’s tax return.

Fifty million retirees face even bigger potential headaches.

For people who receive Social Security, Supplemental Security Income, Railroad Retirement benefits or Veteran’s Disability benefits, the Social Security Administration is sending out $250 payments in May as part of the economic stimulus package.  These payments are meant to provide a boost for people who don’t qualify for the tax credit.

Several retiree categories will face potential problems from the new tax tables.

• Retirees who have earned income and Social Security will receive the $400 benefit in their paychecks and the one-time $250 payment in their Social Security check. They must pay back the $250 when they file their tax return.
• Retirees who have federal income taxes withheld from pension benefits will receive the $400 benefit due to the new tax tables, but since pension benefits are not earned income, they don’t qualify for the tax credit and it will have to be returned.
• Retirees with working spouses who are having taxes withheld at the married rate will receive an excess of $400 through the working spouses paycheck that must be returned.

Treasury Secretary Timothy Geithner said in March that both Treasury and IRS understood the concerns and were “exploring ways to mitigate that effect.”  No news since.

Don’t be caught in the repay surprise:

• Check all federal withholding amounts with those received before April 1. Include all paychecks (you and spouse), Social Security and Pension payments. Multiply that difference by the number of remaining paychecks and payments for 2009.
• Check federal withholding for children with earned income. Calculate any overage and have them readjust their federal withholding amounts.
• Change of federal withholding rates and additional taxes to be withheld may be requested on Form W-4 available from employers and the IRS.
• The IRS and many private tax preparers have a calculator on their Web site to help taxpayers figure withholding.

Remember, the maximum benefit is $400 per worker, $800 per married couple.  If one spouse receives only Social Security benefits, their benefit is $250 for a total of $650.

If you did not have earned income, you are not eligible for the $400 recovery tax credit.

IRS website calculator and W-4 form

“Attention Pensioners: Pensioners do not qualify for the Making Work Pay credit, unless they receive earned income.  However, the new withholding tables apply to all taxpayers, including pensioners.  The IRS has a withholding calculator pensioners and others can use to make sure enough tax is being withheld from their pay.  Adjustments to withholding can be made by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.” 

IRS withholding calculator

Another calculator