2009 Taxes: Making Work Pay Credit and Underpayment Penalties

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Making Work Pay Credit

Part of the government's 2009 American Recovery and Reinvestment Act, the making work pay credit reduces your 2009 taxes up to $400 ($800 for couples filing a joint return). If you're eligible for this credit, chances are you've already been receiving it in the form of reduced withholdings on your paychecks.






Underpayment Penalties

You'll have to pay an underpayment penalty for 2009 if you owe more than $1,000 in taxes (after taking withholding into account) and:

 * Your taxes withheld don't cover at least 90% of your 2009 tax liability, or

 * Your taxes withheld aren't at least 100% of your 2008 tax liability if your AGI is up to $150,000 or 110% if your AGI is more than $150,000. (The amount is $75,000 if you're married filing separately.)

For example:

In 2008 Ellen paid total taxes of $6,000. She thinks her income will be lower in 2009, so she plans to pay $5,000 in estimated tax payments for 2009. When Ellen prepares her 2009 return, she has a total tax of $6,500, $500 more than last year. Since Ellen only paid $5,000 in estimates, she must pay a penalty on the underpaid tax. Ellen would not have had to pay a penalty if she had either:

 - Paid $5,850 in estimated payment (90% of 2009 taxes), or

 - Paid $6,000 in estimated payments (100% of 2008 taxes).