Check your withholding on your paycheck. On April 1 President Obama’s “Making Work Pay” tax credit went into effect with the goal of providing $400 tax cut to individuals and $800 to married couples. It was widely touted by the Obama Administration that the average American family will start taking home $65 more per month.

One little catch. This tax cut was delivered immediately by the IRS issuing new tax withholding tables reducing the amount of withholding from paychecks. The glitch is individuals making more $95,000 and couples making more than $190,000 are ineligible for the tax credit, but are still having their withholding reduced.

Also millions of Americans will have more withheld than they are entitled to under the credit, because the withholding tables do not take into account if you work more than one job or are a married couple where both spouses work. This extra tax credit will need to be repaid next year come tax time. So without making the choice you could be withholding less throughout the year and owe more come April 15, 2010. Surprise!

If you have nothing else to do and spend time on the IRS website like me you would find the IRS encourages using the new withholding calculator for those potentially caught in the glitch. The IRS even clearly defines who is at risk.

The following is from  – You should use this calculator to ensure that the reduced withholding will not result in having too little income tax withheld (possibly causing you to owe taxes next year) if:

  • You are an employee with two concurrent jobs,
  • You and your spouse both work, or
  • You can be claimed as a dependent on someone else’s tax return (since you are not eligible for this credit).

The other big impact group is those with non-government pension income, as your withholding was adjusted as well, but you are not eligible. This means you could owe more come April 15, 2010.

Here is the IRS statement for this group. From  – Pension income: Non-government pension income is not eligible for the Making Work Pay Credit, so we are in the process of updating the calculator to account for this. The update should be operational by late May. If you expect to receive a significant amount of pension income in 2009, you should use this calculator by early June so that you can adjust your withholding appropriately for the second half of the year.

One way to prevent this situation is to use the new IRS withholding calculator and adjust your withholding accordingly. Or call your accountant to see if you should add more withholding due to your tax bracket, job status or combined spousal income.

I guess it’s that saying is true. There is no such thing as free lunch.

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