This stimulus money that we are to get is not like the stimulus checks we have gotten before. Last year we got a check in the mail and that was that. This time it has the name of the Making Work Pay tax credit.
We do not get a check in the mail this time; the employer will be taking less money out of your paycheck with lower withholdings. In the past we’ve gotten our stimulus check and you didn’t have to do anything concerning the next year’s taxes. This time you might end up owing the Internal Revenue Service when you do your taxes in 2010.
If you are single you will get up to $400 and if you are married and filing jointly you will get up to $800. According to the IRS, the tax credit will be calculated at a rate of 6.2% of your earned income. This will start phasing out if you make more than $75,000 if you’re single or $150,000 if you’re married filing jointly.
This is the part that might cause you to owe money on next year’s taxes. If married couples who file jointly are both working, your employer is giving you the credit for you as an employee not knowing what your spouse’s working status is or what their employer is withholding from their paycheck. If both employers were taking out the same lowered withholdings, than you both would in effect be getting $1,600 in tax credit when you should only be getting $800 as a married couple filing jointly. When it comes time to do your 2009 taxes next year, you might find you owe the IRS the $800 back. Which could reduce your normal refund or cause you would owe money to the IRS by as much as $800 more.
If you and your spouse both work and your combined pay goes above the phase out stage, you could owe the IRS back much more come 2010 since each of your employers don’t know what each spouse is earning.
This could also cause problems if you file single but have more than one job. Once again your employer from job number one will take out the lowered withholdings while the employer from job number two will do the same thing, so you could end up owing the IRS the extra money back next year.
One way to prevent this problem is to adjust your withholdings for this year. You can use the IRS withholding calculator to see where you are and adjust your W-4 forms if you need to. A good time to check your withholdings using this calculator would be on July 1st, the end of the second quarter and make any adjustments you need to so you won’t owe the IRS money next April 15, 2010. It is a good idea to check this calculator at any time of the year to make sure everything is fine.
And another warning, if you are working and you are claimed as a dependent on someone else’s return, for example a student with a summer job, you are not eligible for this. In this case you would probably want to talk to your employer about what exactly they need to do with your withholding taxes on your paycheck.
According to the IRS, the credit is refundable, which means that even if you owe no taxes, you still get this credit. Most low-income workers will also qualify for the full credit. So make sure you file your taxes next year to get this credit.
One additional note, if you are eligible for Social Security, Railroad Retirement, veteran’s compensation or pension benefits, you are not eligible for this credit. But if you were eligible for those benefits between November 2008 and January 2009, you will receive a one-time $250 payment no later than mid-June 2009.
Just to be sure I don’t make any mistakes between now and next year, I will be consulting my CPA, barber, bartender, astrologer and the IRS calculator just to make sure my withholdings are all proper.
Resources:
Wall Street Journal
Internal Revenue Service
IRS publication - How to adjust your withholdings
