Payroll Tax Reduction (ARRA 2009)

The American Recovery and Reinvestment Act (ARRA 2009) includes a provision called the Making Work Pay Tax Credit, which effectively provides for a reduction in the payroll tax for up to 95% of working Americans (according to the Obama administration).

How this works is, effective as early as the last week of February but mandatory as of April 1, the payroll tax is to be reduced by up to 6.2% or a maximum of $400 ($800 for a married couple filing jointly) between now and the end of 2009.  The credit begins to phase out for a Modified Adjusted Gross Income (MAGI) of $75,000 or more ($150,000 for married filing jointly) at a rate of 2%.

So, with approximately 40 weeks remaining in the year, this will amount to, at most, $10 per person per week.  In January, 2010, payroll tax withholding schedules will be adjusted again, allowing for this credit to be spread out over the 52 weeks, so the differential will be less at that time, approximately $7.70 per week.  Assuming the law is not extended, the rates will return to previous levels as of January 1, 2011.

If you happen to be eligible to receive the $250 Economic Recovery Payment (for Social Security recipients, Railroad Retirement recipients, veteran’s compensation recipients,  veteran’s pension benefit recipients, or SSI recipients other than SSI recipients in a Medicaid institution), your Making Work Pay Tax Credit will be reduced by the amount of your Economic Recovery Payment.

* Ten bucks worth of back-bacon to the first non-Canadian who can explain (by leaving a comment) why I included that particular gentleman’s picture with this blog entry. 

Fine print: this is not real back-bacon nor is it really ten bucks worth.  It’s just for fun. :-)

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author