Surprise! You got a Tax Cut! (You Just Didn't Notice.)

From the Christian Science Monitor:

Michael Cooper over at The New York Times stopped off at the Pig Pickin and Politickin rally in North Carolina the other day to ask folks about the Obama tax cuts. Their response, not surprisingly, was “What Obama tax cuts?”

This despite the fact that about one-third of the much-reviled 2009 stimulus—or almost $300 billion--came in the form of tax reductions. According to Tax Policy Center estimates, 96.9 percent of households enjoyed a tax cut that averaged almost $1,200. Just one measure—Obama’s Making Work Pay tax credit—put more than $116 billion into people’s pockets in 2009 and 2010.

Yet, a Times poll found that fewer than 10 percent of those surveyed had any clue. Remarkably, fully one-third thought their taxes went up—even though the actual number was about zero.

How could so many people have missed it? After all, $1,200 ain’t nothing. In large part, it was due to the design of Obama’s tax plan. Earlier stimulus tax cuts often came in the form of ostentatious checks from the Treasury. In 2008, for example, President Bush proposed a tax reduction only half the size of Obama’s (about $145 billion). But it was delivered to households in the form of rebate checks—generally $600 per adult and $300 per child.

However, conventional economic wisdom argues that increased withholding over time is more effective stimulus than a single big check. The theory is that people will bank a one-time rebate but spend the extra bucks they get in their weekly pay.

The Tax Hike Nobody's Talking About

The media has placed a lot of attention on a few minor tax changes, such as the new tanning tax. However, little focus has been put on a major tax hike that is about to occur. Unless Congress takes immediate action, the Marking Work Pay credit is due to expire; if it does expire, working taxpayers across the country will have more money withheld from their paychecks.

The credit, introduced last year as part of the government's stimulus package, boosts paychecks by up to $400 for single filers and up to $800 for joint filers, by reducing the amount of tax withheld from each paycheck.

But unlike those cuts, which were largely viewed as a benefit for wealthier Americans, the Making Work Pay credit is designed exclusively as a middle-class benefit, and will affect a wider base of taxpayers.

Continue reading at CNN.com…

IRS: 15 Million Americans May Have to Return Tax Credits

According to the IRS, about 15 million Americans may have underpaid the government by around $400 because of confusion with Obama’s "Making Work Pay" tax credit. In a worst case scenario, all 15 million of those taxpayers will have to pay back that $400 on their next tax bill, in one lump sum payment.

One of the groups most affected by the bureaucratic slip-up: married couples.

If you and your spouse both work and earn more than $13,000, each has been credited $200 too much. That means you'll owe Uncle Sam $400 when you file jointly.

The amount owed goes down for couples making more than $150,000 a year because they weren't eligible for as much of the tax credit.

SMU Cox Business School professor Mike Davis explains the plan was intended to add about $33 a month to everyone's paycheck.

Continue reading at WFAA.com…

Making Work Pay Tax Credit May Cause Tax Debt

Everybody loves getting a little extra money, and the new Making Work Pay stimulus package is designed to give everybody a refundable tax credit spread out over every paycheck. The amount for 2009 and 2010 is up to $400 a year for individual taxpayers and up to $800 for married couples filing a joint return. Sounds great right? Well for some it is, but for seniors whose only income is a pension it may actually create a tax bill for them at the end of the year.

Seniors whose sole income is a private pension or annuity are not eligible for the credit. However, since the new tax tables change the amount being withheld for everyone regardless of their individual situations, many seniors may end up having to pay the credit back! This could mean a reduced tax refund come April 2010 or even a tax debt. Yikes!

So how do you know if you are at risk? All taxpayers should review and adjust their W4 each year to ensure that they have the correct amount withheld and adjusted for the credit. If you have not already done so, take ten minutes and check your withholdings. Additional at-risk taxpayers who are no eligible for the credit include: younger wage earners who are claimed as dependents by their parents, workers with multiple jobs, and Social Security recipients who also have other sources of income.

In addition, the IRS website, www.IRS.gov, provides a withholding calculator you can access on-line to ensure that enough tax is being withheld. You can also request Publication 919 for guidance on tax withholding. Doing so now will ensure that you nip this problem in the bud before it becomes a tax headache next April.

Making Work Pay Payroll Considerations

Over the weekend I was reading up on my tax news, and I came across an interesting article on Don’t Mess With Taxes that outlines payroll considerations for Obama’s new Making Work Pay credit. You can find a segment of the post below, or the full article can be found here.

Not too long ago I talked about the possibility that you might need to coordinate your state withholding in light of the recently enacted American Recovery and Reinvestment Act, aka Obama's first stimulus package.

Well, the effects of the new Making Work Pay credit continue to give us a lot to ponder in this area, even before it starts be doled out in April via reduced paycheck payroll taxes.

In addition to the state withholding issues, folks who aren't eligible for the full $400 paycheck payout will face some tax considerations. Below is a quick look at such taxpayers.

Dependents

Work doesn't pay for dependents, at last not when it comes to this new tax credit. They're not eligible for Making Work Pay money, even if they otherwise qualify because they have a job. This could affect students who have part-time jobs.

In most cases, the employers of these workers will go ahead an adjust payroll withholding. That means that the kids who do get the credit will have to pay it back on next year's tax return they'll have to file.

Nonresident aliens

They face the same situation as dependents; that is, they also aren't eligible for Making Work Pay credit.

If they get the credit this year via payroll tax reductions, they also will have to pay it back when they file a return in 2010.

W-4 (2) In both situations, dependents and nonresident aliens might want to file revised W-4 forms to account for the credit.

The American Payroll Association suggests a single filer divide $400, the amount of credit to be paid out by the end of the year, by the number of paychecks they will receive between April 1 and Dec. 31. That amount should go on line 6 of their new W-4 so that it will offset the ineligible credit amount they'll be getting from the new payroll withholding tables.