metro
05-06-2009, 07:55 AM
This article is from the Pax Pecunaria newsletter from OKC's Freeman Financial Counseling. Home Page (http://www.debtfreeok.com)
As Usual, There’s a Catch!
Well, there may be. Most of you by now have noticed that your paycheck got a little bigger in April. Because of the Making Work Pay provision of the American Recovery and Reinvestment Act (don’t you love how they name these boondoggle laws!),the IRS changed the income tax withholding tables so you take home more of your money.
The purpose of Making Work Pay was to provide Americans a tax credit (not a deduction, but real money back in your pocket) of 6/2% of earned income, up to $400 per individual or $800 per couple. (The credit phases out for individuals making more than $75,000 or couples making more than $150,000.) This credit would be claimed on 2009 (and 2010) tax returns, but withholding tables would be altered so that the credit would be spread out over the remainder of the calendar year.
However, as with most things the government does, there are problems. A significant segment of the population is going to be getting back more on their paychecks than what they are entitled to claim when they file their return.
The reason behind this is that the withholding adjustments apparently didn’t take into account several common scenarios.
For example, a married couple with two incomes of $35,000 each would be eligible for a tax credit of $800. The new withholding tables give them an additional $600—$700 each. As a result, this hypothetical couple might have to repay $400—$600 at the end of the year.
Additionally, the withholding tables don’t take into account individuals with two incomes. Someone filing as single is eligible for only a $400 credit, but might have $600 or more less withheld throughout the year.
Are you a teenager or college student being claimed as a dependent on your parents’ return? You’ll also be receiving a temporary boost in pay (reduction in withholding), but are ineligible for the tax credit. Be prepared to cough it back up.
Retirees might also be hit with a surprise. Retirees who are receiving pension benefits and have taxes withheld will see the additional money credited to their paychecks; however, since pension income is not earned income, these persons are not eligible for the tax credit, and it will all have to be paid back at filing time. All this means is that you need to do a little extra planning to make sure you’re having enough withheld from your check each pay period to cover your tax bill next spring.
The worksheet that accompanies your W-4 (the form you fill out to change your withholding amounts) is usually inaccurate. For a better calculation, use the online calculator found at Internal Revenue Service (http://www.irs.gov) (a direct link to the specific page is on our website, Home Page (http://www.debtfreeok.com), under “other helpful websites”).
If you’re getting money back that you’re going to have to return next spring,(Continued from page 1) either have your withholding amounts changed to reflect the correct calculation, or sock the money away in a savings account so you’ll have it when you need to pay in.
As with everything else the government does, you need to be aware of exactly how it affects you. With this particular Act, their haste to pass pork-laden “stimulus” laws resulted in the passage of a tax bill full of potential problems, and the IRS in their haste to implement the changes (per Obama’s direction) failed to notice the potential pitfalls, or just ignored them.
I guess that’s what happens when you put someone in charge of the IRS who can’t even correctly figure his own taxes.
As Usual, There’s a Catch!
Well, there may be. Most of you by now have noticed that your paycheck got a little bigger in April. Because of the Making Work Pay provision of the American Recovery and Reinvestment Act (don’t you love how they name these boondoggle laws!),the IRS changed the income tax withholding tables so you take home more of your money.
The purpose of Making Work Pay was to provide Americans a tax credit (not a deduction, but real money back in your pocket) of 6/2% of earned income, up to $400 per individual or $800 per couple. (The credit phases out for individuals making more than $75,000 or couples making more than $150,000.) This credit would be claimed on 2009 (and 2010) tax returns, but withholding tables would be altered so that the credit would be spread out over the remainder of the calendar year.
However, as with most things the government does, there are problems. A significant segment of the population is going to be getting back more on their paychecks than what they are entitled to claim when they file their return.
The reason behind this is that the withholding adjustments apparently didn’t take into account several common scenarios.
For example, a married couple with two incomes of $35,000 each would be eligible for a tax credit of $800. The new withholding tables give them an additional $600—$700 each. As a result, this hypothetical couple might have to repay $400—$600 at the end of the year.
Additionally, the withholding tables don’t take into account individuals with two incomes. Someone filing as single is eligible for only a $400 credit, but might have $600 or more less withheld throughout the year.
Are you a teenager or college student being claimed as a dependent on your parents’ return? You’ll also be receiving a temporary boost in pay (reduction in withholding), but are ineligible for the tax credit. Be prepared to cough it back up.
Retirees might also be hit with a surprise. Retirees who are receiving pension benefits and have taxes withheld will see the additional money credited to their paychecks; however, since pension income is not earned income, these persons are not eligible for the tax credit, and it will all have to be paid back at filing time. All this means is that you need to do a little extra planning to make sure you’re having enough withheld from your check each pay period to cover your tax bill next spring.
The worksheet that accompanies your W-4 (the form you fill out to change your withholding amounts) is usually inaccurate. For a better calculation, use the online calculator found at Internal Revenue Service (http://www.irs.gov) (a direct link to the specific page is on our website, Home Page (http://www.debtfreeok.com), under “other helpful websites”).
If you’re getting money back that you’re going to have to return next spring,(Continued from page 1) either have your withholding amounts changed to reflect the correct calculation, or sock the money away in a savings account so you’ll have it when you need to pay in.
As with everything else the government does, you need to be aware of exactly how it affects you. With this particular Act, their haste to pass pork-laden “stimulus” laws resulted in the passage of a tax bill full of potential problems, and the IRS in their haste to implement the changes (per Obama’s direction) failed to notice the potential pitfalls, or just ignored them.
I guess that’s what happens when you put someone in charge of the IRS who can’t even correctly figure his own taxes.