It's been a month since the reduction in federal withholding as part of the Making Work Pay Credit(MWPC). Now is the time to take a look at your tax situation and see where you will be when you do your taxes next year.
The idea behind the Making Work Pay Credit was to give taxpayers extra money that they will spend and help boost the economy. But in helping the economy, some taxpayers will find that they will owe more or get less refund that usual. The first issue is the basic problem with withholding, more than one income. A single taxpayer with one job should not have a tax surprise. The same with a married couple with only one working or both working but at least one of them claiming single on their W-4. A Couple of examples, but first a disclaimer - These are rough examples and both assume a full year of the lower credit. They are also very simple.
Sue has two jobs. The first she makes $300 a week and the second $150 a week for a annual income of $23400. in 2009, she will be taxed on $14050 and the tax will be $1690.
Under the old system, she would have had $41 a week withheld ($31 and $10 (Single 0)) for an annual withholding of $2132 and a $442 refund. Under the MWPC withholding, she will only have $23 a week in withholding ($22 and $1) for $1196 + $400 credit = $1596 and a balance due of $94.
Joe and Jane have their W-4 set as Married 0. One makes $400 a week and the other $250 a week for $33,800 a year and $15,100 taxable income and a tax of $1510. The withholding under the old system ($25 and $10) results in $1820 in withholding and a refund of $310. Under the MWPC withholding, their withholding drops to $10 a week for $520 a year plus $800 credit -$1320 and a balance due of $190.
These examples highlight why it might be a good idea to check your withholding with your tax professional. A simple change can make a big difference. If in the second example, the taxpayer with the lower income ($250 a week) would switch to Single and 1 the extra $5 a week would result in a small refund ($70.)
Other situations where the Make Work Pay Credit may hurt a taxpayer:
- Dependents - they can already have witholding issues but since they don't qualify for the MWPC, this could be worse in 2009.
- Pensioners - they don't get the credit unless they have earned income but the changes in witholding effect the withholding on their pension. Add the fact that many of them use that withholding to offset other income (interest and dividends) and a nasty surprise could wait them next spring.
- High income - there is a phase out of the credit at $75,000 for individuals and $150,000 for married. But that income phaseout is based on all income on the return not just wages. A taxpayer can qualify for lower witholding but lose the credit due to other income on the return.
I am sure there are other triggers, but my biggest concern is for the working people and retirees who don't qualify for other credits that will offset the reduced withholding. They expect a refund and really can't handle another bill. There is time to prevent this but they need to have their tax professional look at their withholding.