We are writing this article to ensure taxpayers are aware of potential withholding problems with the "Making Work Pay Credit" which was part of the American Recovery and Reinvestment Act of 2009, signed by the President on Feb. 17, 2009.
This credit increased the take home pay of eligible individuals. The credit was the lesser of $400 ($800 for joint filers) or 6.2% of the taxpayer's earned income (from one or both spouses).
The IRS then issued new tax withholding tables to all employers in February of 2009. As an employee, you may have noticed an increase in your take home pay as it permitted you to receive the credit in advance in the form of lower tax withholding.
The tables however, were designed to generate a maximum increase of take home pay by $400 for individuals and $600 for joint filers even though the maximum credit for joint filers is $800.
There are several situations where there could be too little or too much withholding. This difference will be reconciled on your 2009 tax return resulting in decreased refunds or increased refunds in some cases.
The following are examples of these surprises.
The most common situation will be an employee with multiple jobs. He could have reduced withholding from each job which could then exceed the maximum credit allowed ($400). He would then owe the IRS the difference and his tax refund will be lowered.
Another example is when a person receiving Social Security or a government pension received a $250 Economic Recovery Payment, as well as a non government pension with the reduced withholding and works part time, again with reduced withholding. This taxpayer could potentially have received too much and would then have a reduced tax refund or even a balance due.
In a situation where a married couple files jointly, and one spouse has a high income and the other spouse not working; the employed spouse could have the maximum withholding reduced from his/her salary (6.2 percent) but which does not amount to the maximum $800 credit. In this instance, the taxpayers would receive additional refund on their tax return.
On another positive note, self employed individuals will receive the credit on their 2009 tax return all at once because they did not have any withholding.
The bottom line is that you may receive a reduced refund or have a balance due on your tax return, if your tax withholding was reduced too much, or a lucky few may receive more of a refund.
Spaulding & Madden Tax Services is a member of the National Association of Tax Professionals (NATP), the National Society of Tax Professionals (NSTP), and the Vermont Tax Practitioners Association (VTPA). Spaulding recently served a three year term as President of the VTPA and as well on its education board. She has also been an instructor for the University of Vermont Extension System Income Tax School.
They can be reached at 722-4500, and their offices are located on Route 5 in Westminster Station.