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Q Thanks to a new law effective April 1, my take-home pay is a little bit higher now. My question is, are tax rates actually lower or is the government just withholding less? If tax rates remain the same, will I face an underpaying penalty when tax time comes next year? Thank you very much!
PIMING, ROSEVILLE
A Yes, your withholding has been reduced slightly thanks to the Making Work Pay Credit that was part of the Obama administration's fiscal stimulus package. The credit is 6.2 percent of earned income up to a maximum of $400 for individuals and $800 for couples. It's in place for 2009 and 2010.
Of course, since we're talking the Byzantine U.S. federal tax code, it isn't that simple. The benefit phases out as income rises between $75,000 and $95,000 for single filers and between $150,000 and $190,000 for couples who file joint returns.
Your employer has already made the adjustment and for a majority of taxpayers that's it. No fuss, no worries, and they pocket the credit. You won't face any penalty come tax time next year. But some people may find that the withholding change overstates their benefit and they'll either owe some of it back at tax time or get a smaller amount back.
Who could find themselves in this position? People who work two jobs, two-income couples and those who can be claimed as a dependent are at risk. You can go to the IRS website and use its Make Work Pay withholding calculator to see if the amount being withheld is what you want. The withholding calculator is at www.irs.gov/individuals/article/0,,id=96196,00.html.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.
