IRS to cut withholding; expect bigger paychecks

Most American workers can expect a small increase in their take-home pay this spring when new Internal Revenue Service withholding standards kick in following passage of the economic stimulus package that was signed into law in mid-February.

The “Making Work Pay” provision included in the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for individuals and $800 for married taxpayers filing joint returns. This credit will be 6.2 percent of earned income but will phase out for taxpayers with adjusted gross income in excess of $75,000 for individuals or $150,000 for married couples.

“For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring,” the IRS announced. “These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee’s 2009 income tax return filed in 2010.”

The credit will be spread out over paychecks most workers receive beginning this spring and continue until the end of the year. Higher-income taxpayers will see little or no change in their take-home pay, however.