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WALNUT CREEK, Calif.
— That little extra bit of money in the form of a
larger paycheck tied to the Obama stimulus plan could
end up taking a bite out of your federal income tax
refund or even leave you owing taxes, say observers.
The
stimulus plan lowered federal income tax withholding
rates, which results in more take-home pay but less
money going toward taxes. The downside is some taxpayers
may end up with not enough taxes being withheld to cover
what they owe in 2009.
As a
result some taxpayers may need to increase their
withholding amount by reducing the number of allowances
claimed for the rest of year, which means making changes
to a W-4 form available from an employer's human
resources department.
Single
taxpayers who are working at more than one job and
married couples filing jointly in a situation where both
spouses work are the most likely groups of taxpayers to
be caught short.
"They
are probably going to find out they are either getting a
lot less back or they might owe," said
Mark Steber
, chief tax officer at
Jackson Hewitt Tax Service
, a tax preparation firm.
Others
that could face this scenario are those who can be
claimed as a dependent on someone else's tax return (for
example, a working student claimed as a dependent on a
parent's tax return) and some
Social Security
recipients who work.
Most
people who receive the credit have seen their paychecks
grow by
$15 to $20
per pay period since April as a result of employers
taking out less withholding, said Steber.
The
Making Work Pay credit is equal to 6.2 percent of earned
income, whether it be from job wages or self-employment.
It applies to 2009 and 2010. For the individual
taxpayer, the credit is worth up to
$400
a year and for married couples filing joint returns,
it's worth up to
$800
. The credit is phased out for individuals with adjusted
gross incomes between
$75,000 and $95,000
and for married couples with adjusted gross incomes
between
$150,000 and $190,000
.
"I
don't think many people realize that (because of the
credit) they may not have the correct withholding and
could owe at tax time," said
Kelly Batson
, a director of the Earn It! Keep It! Save It!, a tax
assistance program for low-income taxpayers. "They
need to check their withholding now."
Taxpayers
who have concerns about whether withholding amounts may
need adjusting can go to the IRS Web site (http://www.irs.gov)
and use an online withholding calculator.
For
single taxpayers, the
American Payroll Association
estimates the credit will generally reduce withholding
by
$400
a year.
A single
taxpayer with two jobs would actually receive the credit
twice even though he or she is only entitled to receive
it once, according to Steber.
For
married couples filing jointly the credit will generally
decrease total withholding by
$600
a year, said the
Payroll Association
. That means if both spouses work, their combined
withholding would be reduced by
$1,200
(2 x
$600
), even though their maximum credit would be
$800
, which means they could end up owing
$400
in taxes or be short that amount in a refund. "If
you are a married couple with two incomes, you may be
getting too much of the credit," Steber said.
"The withholding tables don't know the other spouse
is working."
Conversely,
a married couple filing jointly with one working spouse
will have
$600
less in withholding but would be entitled to an
$800
credit, which would result in an additional
$200
.
People
who are already working and take on a holiday job should
consider being more aggressive when choosing a
withholding amount for the holiday job, Steber said.
"For
many workers that means selecting the single status with
zero dependents when completing form W-4," he said.
"Completing a W-4 in this way will cause a slightly
higher amount to be withheld, which may help offset the
duplicate Making Work Pay credit that the worker
receives."
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TAX BITE?
Here is
an example where a single taxpayer with two jobs could
end up with a smaller refund or even owe taxes as a
result of a provision of the Obama stimulus plan.
Assume a
single taxpayer, who claims single filing and single
withholding status with zero allowances for
withholdings, earned
$35,000
last year working two jobs. He earned
$10,000
in one job and
$25,000
in the other job. The total withholdings under the old
withholding rates would be
$3,700
; the total under the new tables is
$2,969
. Because the total reduction in withholdings is
$731
and the Making Work Pay Credit is
$400
, this leaves the taxpayer with a shortfall of
$331
.
Source:
Jackson Hewitt Tax Service
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