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Yes. The credit has income limits, so a big enough income spike from stock compensation could push you out of the credit range or complicate your tax return (see the section below about this potential headache).
Background Of The Credit
Available in 2009 and 2010, the Making Work Pay Credit was created by the American Recovery & Reinvestment Act, signed into law in February 2009. (In its budget proposals of Feb. 2010, the Obama administration expressed an intention to extend the credit through 2011, though Congress must approve this.)
The credit is the lower of either 6.2% of your income or $400 ($800 for married joint filers), so for most people the credit amounts to $400 per individual. Unusually for a temporary tax break, the credit is being deployed to eligible people via the tax-withholding system that employers (or their payroll companies) apply to the wages of employees. Therefore you receive the credit in higher take-home pay. No checks will be sent by the government, as was the case with the tax rebate of 2008.
Alert: You need to file Schedule M with your tax return (Form 1040 or 1040A) to determine whether you have already received the full amount of the credit through reduced withholding or whether you can claim more of the credit. See the Schedule M instructions at the website of the IRS. Taxpayers who file Form 1040-EZ must use the worksheet for Line 8 on the back of the form.
Credit Provided Through Employer Withholding
The IRS told employers to factor the credit into their withholding no later than April 1, 2009. The credit will be spread out over the remaining paychecks for the year. You must then claim the credit on your tax return for 2009, filed in 2010 (and again on your tax return for 2010, filed in 2011). People who have no withholding from their income (e.g. contractors, consultants, or the self-employed) can claim the credit on their tax returns for 2009 if their income meets the eligibility requirements.
The credit starts to phase out for taxpayers who file singly and have modified adjusted gross income (MAGI) between $75,000 and $95,000, and for married joint filers who have MAGI between $150,000 and $190,000. Single filers with MAGI above $95,000 and joint filers with MAGI above $190,000 are ineligible for the credit.
In 2010, you may notice a slight reduction in the amount of your paychecks from the amount you saw in 2009. This is because the Making Work Pay Credit applied for only nine months in 2009 but applies for the full 12 months of 2010. The withholding for the credit in 2010 is therefore spread more thinly than it was in 2009, resulting in slightly more withholding from each paycheck. However, if your eligibility for the credit remains the same in 2010 as it was in 2009, the total amount of the credit available to you is the same in both years.
Income Spike Can Make You End Up Paying Tax On Credit
An apparently unforeseen complication lurks in the Making Work Pay Credit. If the credit is factored into your regular salary withholding but other income from a separate source makes you ineligible for the credit, you may unexpectedly have to pay extra taxes on the credit with your tax return. Income having this effect may include stock compensation.
When it considers withholding adjustments for the credit, your company will determine your eligibility according to your regular salary income at that time. However, it may not consider income you receive from stock compensation that pushes your true modified adjusted gross income for that year out of the credit range. To complicate matters further, earnings of your spouse (including stock compensation) can also put your combined income above the credit threshold.
To remedy this situation, you may want to adjust your withholding by filing a revised Form W-4 to ensure enough tax is withheld. While this would not apply to withholding rates for supplemental income, it would adjust your salary withholding. For information on adjusting your withholding, see IRS Publication 919.
For more on this potential headache in the Making Work Pay Credit, see a report released in November 2009 by the Treasury Inspector General for Tax Administration. The report estimates that over 15 million taxpayers may owe extra taxes with their returns for 2009 because of the credit. |
