WASHINGTON (AP) -- 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.
"They need to get the Goodyear blimp out
there on this," said Tom Ochsenschlager, vice
president of taxation for the American Institute of
Certified Public Accountants.
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.
The IRS has a calculator on its Web site to help
taxpayers figure withholding. So do many private tax
preparers.
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.
For example:
--A single worker with two jobs making $20,000 a
year at each job will get a $400 boost in take-home
pay at each of them, for a total of $800. That
worker, however, is eligible for a maximum credit of
$400, so the remaining $400 will have to be paid
back at tax time -- either through a smaller refund
or a payment to the IRS.
The IRS recognized there could be a similar
problem for married couples if both spouses work, so
it adjusted the withholding tables. The fix,
however, was imperfect.
-- A married couple with a combined income of
$50,000 is eligible for an $800 credit. However, if
both spouses work and make more than $13,000, the
new withholding tables give them each a $600 boost
-- for a total of $1,200.
There were 33 million married couples in 2008 in
which both spouses worked. That's 55 percent of all
married couples, according to the Census Bureau.
-- A single college student with a part-time job
making $10,000 would get a $400 boost in pay.
However, if that student is claimed as a dependent
on a parent's tax return, she doesn't qualify for
the credit and would have to repay it when she files
next year.
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.
More than 20 million retirees and survivors
receive payments from defined benefit pension plans,
according to the Employee Benefit Research
Institute. However, it is unclear how many have
federal taxes withheld from their payments.
The American Federation of State, County and
Municipal Employees union raised concerns about the
effect of the tax credit on pension payments in a
letter to Treasury Secretary Timothy Geithner in
March.
Geithner responded that Treasury and IRS
understood the concerns and were "exploring
ways to mitigate that effect."
Rep. Dave Camp of Michigan, the top Republican on
the tax-writing House Ways and Means Committee, said
Geithner has yet to respond to concerns raised by
committee members.
"So far we've got the, 'If we don't address
this maybe it will go away' approach," Camp
said.
IRS withholding calculator:
http://www.irs.gov/individuals/article/0,,id96196,00.html
