Making Work Pay Tax Credit Is Untaxed Income

The Making Work Pay Credit is to be included as untaxed income on the 2011-12 FAFSA (questions 44i and 92i) and during verification, according to recent guidance from the U.S. Department of Education (ED). Recent confusion and inquiries from the financial aid community motivated ED to clarify guidance on the proper treatment of the Making Work Pay Credit on the FINAID-L listserv and on page AVG-19 in the Application and Verification Guide section of the 2011-12 FSA Handbook.

Created under the American Recovery and Reinvestment Act of 2009 (ARRA -- Public Law 111-5), the Making Work Pay Credit provides a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns. Most workers received the benefit of this tax credit through an increase in take-home pay, reflecting reduced federal income tax withholding by their employers during 2010. Taxpayers who do not have taxes withheld by an employer during the year claim the full credit on their 2010 tax returns.

Part of the reason for confusion in the financial aid community rests in the ARRA language related to the Making Work Pay Credit provision and in the fact that the tax credit was previously omitted from ED's sub-regulatory FSA Handbook guidance. Section 1001, subsection (c) of the ARRA states that these credits "shall not be taken into account as income and shall not be taken into account as resources for the month of receipt and the following 2 months, for purposes of determining the eligibility of such individual or any other individual for benefits or assistance..., under any Federal program or under any State or local program financed in whole or in part with Federal funds."

Nevertheless, unlike some other tax credits (e.g., Lifetime Learning tax credit, additional child tax credit, earned income credit, etc.) which are specifically excluded from need analysis by the Higher Education Act (HEA), the Making Work Pay Credit is not similarly excluded. Therefore, schools should follow ED's recently posted guidance and treat the credit as untaxed income for Title IV purposes.

On past such occasions when we have received clarification on the treatment of various items found on a tax return, ED has said the guidance is in effect for the entire award year regardless of when that clarification became available. If the school has a tax return or IRS Data Retrieval information which shows receipt of this tax credit, then it will need to review the amount of untaxed income reported on the FAFSA and resolve any conflicting information, as necessary.

All eligible taxpayers must file a Schedule M to claim the Making Work Pay Credit on the 2010 tax return. The Schedule M is used to determine if the taxpayer has already received the full credit in his or her paychecks throughout the year or if he or she is due remaining funds at the end of the year. Those who do not have taxes withheld during the year file the Schedule M to claim the full credit at year's end. For 2010, the amount of the tax credit being claimed by the taxpayer appears on line 11 of his or her Schedule M; this amount is then transferred to line 63 on Form 1040 or line 40 on Form 1040A. Form 1040-EZ filers use the worksheet on the back of the 1040-EZ to calculate the tax credit amount, which is then reported on line 8 of the 1040-EZ.

For additional information on the Making Work Pay Credit, including who is and is not eligible to receive it, please refer to the IRS website. You may also contact an IRS representative for tax guidance by calling 1-800-829-1040 toll-free between 7:00 am and 10:00 pm (your local time) or by calling your local IRS Taxpayer Assistance Center. Taxpayer Assistance Center contact information is also available on the IRS website. 


Publication Date: 4/4/2011

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