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Stimulus pay windfall could turn into tax-time burden

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, observers say.

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 not end up with enough taxes being withheld to cover what they owe in 2009.

As a result, some taxpayers may need to increase their withholding by reducing the number of allowances claimed for the rest of year, which means making changes to the 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 who 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, Steber said.

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.

Taxpayers who have concerns about whether withholding amounts may need adjusting can go to the IRS Web site (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 entitled to receive it only once, Steber said.

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."

Tax bite?

Here is an example in which 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 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

Stimulus pay windfall could turn into tax-time burden 10/31/09 [Last modified: Saturday, October 31, 2009 4:32am]
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