My wife Terri, who is an accountant, pointed to an article titled “Taxpayers to get rude surpise,” which addresses President Obama’s tax credit. Here are some important highlights:
Millions of Americans enjoying their small windfall from President Barack Obama’s “Making Work Pay” tax credit are in for an unpleasant surprise next spring.
The government is going to want some of that money back.
The tax credit is supposed to provide up to $400 to individuals and $800 to married couples as part of the massive economic recovery package enacted in February. Most workers started receiving the credit through small increases in their paychecks in the past month.
But new tax withholding tables issued by the IRS could cause millions of taxpayers to get hundreds of dollars more than they are entitled to under the credit, money that will have to be repaid at tax time.
At-risk taxpayers include a broad swath of the public: married couples in which both spouses work; workers with more than one job; retirees who have federal income taxes withheld from their pension payments and Social Security recipients with jobs that provide taxable income.
The Internal Revenue Service acknowledges problems with the withholding tables but has done little to warn average taxpayers.
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For many, the new tax tables will simply mean smaller-than-expected tax refunds next year, IRS spokesman Terry Lemons said. The average refund was nearly $2,700 this year.
But taxpayers who calculate their withholding so they get only small refunds could face an unwelcome tax bill next April, said Jackie Perlman, an analyst with the Tax Institute at H&R; Block.
“They are going to get a surprise,” she said.
Perlman’s advice: check your federal withholding to make sure sufficient taxes are being taken out of your pay. If you are married and both spouses work, you might consider having taxes withheld at the higher rate for single filers. If you have multiple jobs, you might consider having extra taxes withheld by one of your employers. You can make that request with a Form W-4.
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Obama has touted the tax credit as one of the big achievements of his first 100 days in office, boasting that 95 percent of working families will qualify in 2009 and 2010.
The credit pays workers 6.2 percent of their earned income, up to a maximum of $400 for individuals and $800 for married couples who file jointly. Individuals making more $95,000 and couples making more than $190,000 are ineligible.
The tax credit was designed to help boost the economy by getting more money to consumers in their regular paychecks. Employers were required to start using the new withholding tables by April 1.
The tables, however, don’t take into account several common categories of taxpayers, experts said.
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Some retirees face even bigger headaches.
The Social Security Administration is sending out $250 payments to more than 50 million retirees in May as part of the economic stimulus package. The payments will go to people who receive Social Security, Supplemental Security Income, railroad retirement benefits or veteran’s disability benefits.
The payments are meant to provide a boost for people who don’t qualify for the tax credit. However, they will go to retirees even if they have earned income and receive the credit. Those retirees will have the $250 payment deducted from their tax credit — but not until they file their tax returns next year, long after the money may have been spent.
Retirees who have federal income taxes withheld from pension benefits also are getting an income boost as a result of the new withholding tables. However, pension benefits are not earned income, so they don’t qualify for the tax credit. That money will have to paid back next year when tax returns are filed.
Leave it up to government to turn this stimulus into an accounting nightmare for many. Most people are not even aware of these issues since they are not exactly front page news. If you think you might be affected by having to return part of your stimulus, be sure to consult with your tax professional to ensure compliance.
Otherwise, you may become part of the dark side of this stimulus plan, which means the IRS could potentially assess you penalties and interest for non-compliance resulting from a problem you didn’t create in the first place.
Comments 4
We have had similar gimmicks in the past. An illusion of a tax cut can be achieved by cutting withholding without cutting taxes. It’a a way to “stimulate” the economy by giving you a tax cut that is really just a slightly deferred tax that will hit you unexpectedly after your money has all been spent on wine, women and song.
Taxxcpa,
I expected to hear from you on this topic. Were you aware of these issues and potential problems?
Ulli…
Since my income was always somewhat variable, before and especially after retirement I always dictated my tax withdrawals, paying attention to the legal requirement that you pre-pay at least 90% of your previous year’s actual taxes, and in some cases 100%.
I always use the 100% rule, have a small amount deducted from my pension, and make up the 100% with some lump sum payments.
taxxcpa, remember the old, I think ancient Roman adage: “Beware of Greeks bearing gifts”. Applies to this administration.
Every time the government changes anything about the tax code to “simplify” or “stimulate” it seems, inevitably, to do more harm than good.
The one good change was when they did away with those 90% tax brackets they had back in World War II.
If they could simplify it so that your tax return could be completed on a post card sized form, it might save so much in the cost of administering the taxes that it would benefit the treasury more than any tax increases.