Normally, new tax credits can be a great way to stimulate the economy. Here is why Making Work Pay tax credit could end up making you owe taxes at the end of the year.
Earlier this year, the administration passed a massive stimulus program that included Federal grants, projects and a tax credit for many American families. The Making Work Pay tax credit allowed many Americans to have less taxes withheld from their payroll checks. Unfortunately, some taxpayers won’t qualify and will actually find themselves owing additional taxes at the end of this year due to the Making Work Pay tax credit. Treasury Inspector General J. Russell George estimates that more than 10% of taxpayers will end up owing additional taxes.
In conjunction with the Making Work Pay tax credit, the IRS issued a new withholding guide for Federal income taxes (Publication 15-T). This guide provided lower tax withholding amounts so that taxpayers could benefit from the MWP credit throughout the year instead of having to wait until they filed their personal return for 2009.
Taxpayers will run into trouble when they do not fit the mold that the IRS withholding tables are designed for. Individuals with more than one job or families where both spouses work may be withholding at the lower rates in both jobs, effectively applying the credit twice. This will result in the taxpayers not having enough taxes paid in throughout the year and owing additional taxes when they file their 2009 and 2010 income tax returns.
Retirees who received $250 checks from the Social Security Administration will need to repay those with their 2009 income tax return if they qualified for the MWP credit as well. This payment was intended to be a stimulus for retirees in lieu of the MWP credit. However, it was paid to many retirees regardless of their current employment status. As a result, many will receive the MWP credit, making them ineligible for the $250 stimulus payment they have already received and spent.
Due to broad nature of the withholding tables, we do not anticipate the IRS correcting this issue next year. If you have more than one job, or if you and your spouse work, you may want to consult your tax preparer to ensure that you are withholding enough taxes.