My earlier warnings about problems that the Making Work Pay tax credit will cause some folks are now official.
The credit seemed like such a good idea. Under the stimulus package enacted in February, the credit will provide individuals up to $400 and couples up to $800.
To get it, all people have to do was continue to collect their paycheck. The IRS rejiggered the withholding tables so that workers would simply have a bit less in payroll taxes taken out each pay period.
Then life met tax theory and whack! Now some taxpayers are going to find they'll have to give that extra paycheck cash back at tax filing time.
TIGTA's analysis: In its report (take a deep breath) Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With the Making Work Pay Credit, TIGTA found, well, just what the title says.
TITGA estimates that more than 15.4 million taxpayers could unexpectedly owe taxes on their 2009 returns because of the credit. The problem is that these particular taxpayers were given, via reduced payroll withholding, more of the credit than they're entitled to.
And just who are these taxpayers in danger of owing because of excessive Making Work Pay advance credit amounts? They are:
- Dependents who receive wages.
- Single taxpayers with more than one job.
- Joint filers where one or both spouses have more than one job or both spouses work.
- Individuals who file a return with an Individual Taxpayer Identification Number.
- Taxpayers who receive pension payments.
- Social Security recipients who receive wages.
Even worse, says TIGTA, more than 1.2 million affected taxpayers might end up:
- Having to pay back some or all of the Making Work Pay Credit they got via their paychecks this year, and
- Facing an estimated tax penalty because of withholding underpayments thanks to credit.
Your next steps: So what can you do if you fear you might end up inadvertently owing the IRS next filing season?
There's not much time left, but you still can adjust your withholding for the remaining pay periods. Get to your HR/payroll office as soon as possible and fill out a new W-4.
To make sure the amount you're having taken out is correct, use the IRS' online withholding calculator.
Also note that also can have a specific dollar amount taken out of your paycheck to go toward withholding in addition to the regular chunk that is automatically allocated to FICA.
Finally, don't panic. If you're not one of the target groups (multiple job holder, dual-income couple,someone's dependent, etc.), you should be OK.
And the worst that will happen if you're one of those folks who routinely overwithholds as a way of forced savings is that you'll simply see smaller-than-expected tax refund check next year.
- Making Work Pay payroll considerations
- Making Work Pay problems revisited
- Schedule M, yet another new form
- Retiree $250 stimulus checks on the way