Previously Studied Tax Credit Scratched From Tax Preparer Test

Tax preparation work in 2012 is demanding frequent explanations to taxpayers about the disappearance of a significant tax credit from preceding years. The Making Work Pay Credit formerly provided working individuals with up to $400 on their tax returns.

The Making Work Pay Credit is eliminated for tax returns beginning with the 2011 tax year. Only tax preparer jobs on delinquent tax returns for past years require determination of the credit.

In addition, some individuals failed to claim the credit on returns of prior years. Anyone in this situation can still obtain the credit by hiring a Registered Tax Return Preparer to amend returns for up to three years. However, caution is advised when any tax practitioner is asked to create an amended tax return to claim the Making Work Pay Credit. The IRS made efforts to adjust the tax returns of individuals who accidentally omitted the credit from originally filed returns.

Completion of Schedule M was studied in tax preparation courses as the form used to claim the Making Work Pay Credit. Just because a person's tax return copy excludes this form doesn't mean the IRS did not subsequently apply the credit. Taxpayers might not remember payments of the credit after their original returns were filed. To resolve this quandary, a professional possessing a tax preparer license can have a client request of the IRS a taxpayer transcript for a prior year.

The Making Work Pay Credit was not extended to 2011 because a payroll tax reduction was implemented in its place. Employee wages in 2011 were reduced by a lower percentage for Social Security tax. This turned the 2012 tax cut into a "pay as you go" measure. The Making Work Pay Credit only had that impact for a worker who reduced tax withheld on paychecks. The consequence of lower withholding resulted in a tax due with the return, which was covered by the credit.

Few workers adjusted their paycheck withholding. Instead, they received the Making Work Pay Credit as a higher tax refund. Elimination of the credit normally means reduced refunds for 2012 tax returns.

With the removal of this tax credit, study for the tax preparer test contains some new features. That examination in 2012 is based upon 2011 tax laws. One of the 2011 rules is that self-employment tax is also lowered by the smaller allocation for Social Security taxes. The 2011 self-employment tax rate for Social Security is 10.4 percent rather than the typical 12.4 percent. The Medicare component of self-employment tax is unchanged.

The full impact in 2013 for preparation of 2012 tax returns is not known with certainty. However, the partial extension of the payroll tax reduction for the first two months of 2012 does create a special tax calculation for anyone receiving more than $18,350 of wages during those two months.

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