Check your paychecks – You may owe taxes at the end of 2009

Disclaimer: This is independent research. Check with someone smarter than me before going and screwing up your life.

Remember how our paychecks suddenly got a little heavier, as our federal taxes decreased?

The reason for that is that President Obama’s first stimulus act (American Recovery and Reinvestment Act) included a $400 tax credit (Making Work Pay Credit) for the 2009 tax year. Unlike a lot of tax credit’s we see however, this one was included at the employer level, paid out over the year in the form of tax deductions. In other words, you’re getting a $400 tax credit, but rather than take it off your 2009 tax bill, they’re giving it back by giving you more of your withholding money.

However, it was a poorly planned tax credit. Unfortunately, in a variety of circumstances, average-joe families may have several hundred dollars in money they’ll need to take out of their 2009 refund, or worse yet, if they usually break even, they’ll end up owing it back.

Situations in which you may be overpaid (Consumerist, CNN, other):

  • Anyone who holds more than one job
    • You will get paid the Making Work Pay Credit twice, up to $400 ($800 for a joint filer) from your first employer and up to $400 ($800 for a joint filer) from your second employer
  • Joint filers whose spouses work
    • Each spouse will end up being paid the credit for married couples by each of their employers. There’s a twist, too. Because of the way the withholding tables were set up, each working spouse may be paid up to $600 this year – instead of up to the $800, Mezistrano said. In other words, the husband would receive $600 at his job and the wife $600 at her job, for a total of $1,200. Since they’re only entitled to $800 total as a couple, that means they would have to pay $400 back to the IRS – or see their refund reduced by that amount
  • Anyone who receives income from a rental property or investment, such as interest and dividends.
    • Your employer only knows about the income you earn at the company. If you receive other income that increases your modified adjusted gross income – or even pushes you past the income limits for the credit – you may end up owing the IRS some or all of the credit you received in your paycheck
  • The credit phases out for couples who file jointly and have adjusted gross income between $150,000 and $190,000. So if one of you is getting it withheld, you’ll just end up owing it back at the end of that year, because you never actually qualified to receive it
  • Anyone who started receiving their credit at the end of Febuary or anytime in March.
    • The withholding tables are structured so that payments starting in April will add up to $400 for single filers and $800 for joint filers by year end. If payments start sooner than that a tax filer may actually receive a bit more than he’s due by Dec. 31 Conversely, if your employer doesn’t start your payments until the end of April or in May – there’s no penalty if an employer doesn’t meet the April 1 deadline – you may end up getting a little less of a credit than you’re entitled to, in which case you can claim the rest when you file your 2009 tax return
  • If anyone is like me, there could also be in trouble (maybe). Last year, before this tax credit, I made a change in my withholding, claiming many more dependents than I actually had to help get a more accurate withholding scheme. Getting more money in my check each money, while still withholding enough to not owe the IRS anything. This is recommended by the IRS. Unfortunately, once this tax-credit is applied, my withholding is so low that I still may not actually meet my 2009 tax withholding obligation. If I don’t change my withholding to withhold more money, I could potentially end up owing money to the IRS for the first time at the end of this year.