Bailout Tax Credit? Some Taxpayers Might Have To Give It Back!

  • Facebook
  • Twitter
  • Delicious
  • LinkedIn
  • StumbleUpon
  • Add to favorites
  • Email
  • RSS

Tax (1)

Millions of Americans are just about to enjoy their small break from President Barack Obama’s “Making Work Pay” tax credit.  However, they are in for an unpleasant surprise next spring.  The government is going to want some of that money back and IRS didn’t tell anyone about it.

The “Making Work Pay” provision of the recently enacted bailout plan will provide a refundable tax credit.   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.  An estimate of 95 percent of working families will qualify in 2009 and 2010.

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.  Most workers started receiving the credit through small increases in their paychecks in the past month.
However, there is a catch!    The new tax withholding tables issued by the IRS don’t factor in several common categories of taxpayers.   These taxpayers will have over the $400-$800 they’re entitled to, but tax time in 2010, they’ll have to give back the additional amount.

These taxpayers include broad categories 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.  For example consider the following:

Single worker with two jobs:  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.

A married couple with two jobs:  the IRS recognized there could be a similar problem for married couples if both spouses work, so it adjusted the withholding tables.  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:  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.

Retirees:  some retirees face even bigger headaches.  The Social Security Administration is sending out $250 payments to more than 50 million retirees in May. 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 next year.

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 be paid back next year when tax returns are filed.   More than 20 million retirees and surviving spouses receive will be affected by this change.

Generally, the average refund was nearly $2,700 this year.   For many, the new tax tables will simply mean smaller-than-expected tax refunds next year.   But taxpayers who calculate their withholding so they get only small refunds could face an unwelcome tax bill next April, long after the money may have been spent.

The Internal Revenue Service acknowledges problems with the withholding tables but has done little to warn average taxpayers. In addition, Geithner responded that Treasury and IRS understood the concerns and were “exploring ways to mitigate that effect.”  The IRS has a calculator to help taxpayers figure withholding on its website.

My advice to you:  prepare yourself for an unpleasant tax surprise next spring.    There is nothing you can do about it, but to educate yourself.  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 most important: don’t spend all of your money and put away an amount that you have to give back next year.

Anna Timone (195 Posts)


Speak Your Mind

*