Millions might end up paying back part of Making Work Pay tax credit

More than 15 million people who received the Making Work Pay tax credit as part of Obama’s $787 billion stimulus package may end up paying back part of their tax credit due to the federal government mishandling allocation of the credit.

The Treasury Department admits that the government may have been too generous in distributing the credit, and taxpayers who received the credit but were otherwise ineligible may end up actually owing money to the federal government.

The Making Work Pay tax credit was Obama’s signature tax credit and provides workers 6.2 percent of their earned income, up to $400 for individuals and $800 for couples or joint filers. Individuals making more than $95,000 and couples making more than $190,000 are ineligible. The tax credit was aimed at boosting the paychecks of nearly 95% of all working Americans to encourage spending and consumption.

However, the problem was in the system of paying out the tax credit. The tax credit was distributed to most workers through reduced withholding on their federal income tax, which lead to small increases on their monthly paychecks throughout the year. Workers saw the advance in their paychecks almost immediately when the legislation was signed in April; however, they were not required to claim it until much later on their tax returns. The legislation didn’t take into account certain circumstances, like some taxpayers who have more than one job, married couples with two working spouses, and those who receive Social Security. In these cases, taxpayers may have been advanced more than they were entitled to receive on the tax credit. Nearly 15.4 million workers, or 10% of all taxpayers, may be liable to pay back a part of the tax credit by owing additional taxes when they file in 2010.

Paying back the tax credit may impact some workers with smaller-than-expected tax refunds, which averaged $2,800 this year, or it might mean actually paying out of pocket for others. The Treasury Department maintains that the stimulus tax credit has been effective in helping 110 million families with the pumped up month-to-month paychecks. But the poor structuring of the tax credit allocation may do more to annoy taxpayers already hard-up paying bills and taxes. This glitch in stimulus fund handouts, if not addressed, may plague more taxpayers in 2010 who will be stuck footing the bill on what was supposed to be a tax break.

At Credit Karma Blog, what goes around comes around… So what do you think about the fact that millions may need to repay part of this tax credit? Agree, disagree, or have something more to say? We’d love to hear your reactions!