Making Work Pay tax problems ... again

My earlier warnings about problems that the Making Work Pay tax credit will cause some folks are now official.

The Treasury Inspector General for Tax Administration (TIGTA) has issued a formal report on the matter that I blogged about back in March.

The credit seemed like such a good idea. Under the stimulus package enacted in February, the credit will provide individuals up to $400 and couples up to $800.

To get it, all people have to do was continue to collect their paycheck. The IRS rejiggered the withholding tables so that workers would simply have a bit less in payroll taxes taken out each pay period.

Then life met tax theory and whack! Now some taxpayers are going to find they'll have to give that extra paycheck cash back at tax filing time.

TIGTA's analysis: In its report (take a deep breath) Millions of Taxpayers May Be Negatively Affected by the Reduced Withholding Associated With the Making Work Pay Credit, TIGTA found, well, just what the title says.

TITGA estimates that more than 15.4 million taxpayers could unexpectedly owe taxes on their 2009 returns because of the credit. The problem is that these particular taxpayers were given, via reduced payroll withholding, more of the credit than they're entitled to.

And just who are these taxpayers in danger of owing because of excessive Making Work Pay advance credit amounts? They are:

• Dependents who receive wages.
  
• Single taxpayers with more than one job.
  
• Joint filers where one or both spouses have more than one job or both spouses work.
  
• Individuals who file a return with an Individual Taxpayer Identification Number.
  
• Taxpayers who receive pension payments.
• Social Security recipients who receive wages.
  

Even worse, says TIGTA, more than 1.2 million affected taxpayers might end up:

1. Having to pay back some or all of the Making Work Pay Credit they got via their paychecks this year, and
2. Facing an estimated tax penalty because of withholding underpayments thanks to credit.
   

Your next steps: So what can you do if you fear you might end up inadvertently owing the IRS next filing season?

There's not much time left, but you still can adjust your withholding for the remaining pay periods. Get to your HR/payroll office as soon as possible and fill out a new W-4.

To make sure the amount you're having taken out is correct, use the IRS' online withholding calculator.

Also note that also can have a specific dollar amount taken out of your paycheck to go toward withholding in addition to the regular chunk that is automatically allocated to FICA.

Finally, don't panic. If you're not one of the target groups (multiple job holder, dual-income couple,someone's dependent, etc.), you should be OK.

And the worst that will happen if you're one of those folks who routinely overwithholds as a way of forced savings is that you'll simply see smaller-than-expected tax refund check next year.

Related posts:

• Making Work Pay payroll considerations
• Making Work Pay problems revisited
• Schedule M, yet another new form
• Retiree $250 stimulus checks on the way

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Comments

[pam underwood]

what a bunch of crap! The IRS states my husband received the $250, we didn't even know it (I didn't receive the credit). Turbo Tax rejected the efile, corrected it and owed $250 more. Very aggravating.

[Henry]

Yeah basically we are screwed. In our second careers we are now in the other "middle class" - those who earn less than $50k a year total income. When you earn less - less taxes are taken out. It becomes complicated if you both work because your incomes add to a higher number. We we're wacked with a $900 tax bill in '08. So in '09 we adjusted our withholdings up but it now seems this withholding scheme has left us with a $1.5K tax bill.

[Katrina Bond]

This exact thing he warns of is happening. My husband works for the State of GA and they took out $1000 less in federal taxes last year and now we owe all of it back. Bastards. $#$% Obama.

[Rick]

@John: Based on real life checks for two married individuals filing jointly, the stimulus amount is $133 per month ($66.66 each) each; I didn't make that number up. The stimulus is received for 10 paychecks as it started in March. The excess over the credit received is going to be $530.

If you didn't notice the extra $133 in your bank account each month, I'm guessing you will notice the $530 reduction in your refund!

[John Kelly]

The spin from IRS is interesting (today's Wash Post). They downplay the 15.4 million taxpayers claiming TIGTA have double counted. TIGTA admitted they double counted a grand total of 2,681 filers. Then they claim that "the vast majority will only receive a slightly reduced refund." That is because 3/4 (their "vast majority") of filers "receive refunds which averaged more than $2,800."

First, this is not a "slight" reduction. According to the TIGTA report, this applies to groups of taxpayers who are ineligible for the credit in $200 to $1,000 increments. Hardly slight for the middle class taxpayer it was intended to help.

Second, the fact that 3/4 of filers receive a tax refund is a red herring. Whether it's coming out of a paycheck or coming out of a refund check, it's still coming out of the taxpayer's pocket.

Third, yes, the average tax refund check is probably more than $2,800 - including those in the higher income brackets who, if they receive a refund, probably drive up the average. And they never qualified for the credit.

Fourth, they got other credits for buying appliances, and cars and first-time homes (Really? You want to bring that up?) so they probably won't notice a few hundred dollars missing from their refund.

There's more but I'm dizzy.

[John Kelly]

I strongly suspect this will get a lot of attention in coming weeks. @Rick: Not surprising people didn't notice an extra $12 in their paychecks but they will notice when they owe the IRS $300 in January.

TIGTA's recommendations are silly:

1. Media coverage (announce to the world that 15M middle class taxpayers have to pay back the relief they thought they were getting).

2. IRS withholding calculator (recalculate your withholding, submit new W-4 to payroll, hope paycheck is adjusted in the next 5 weeks).

[Rick]

During one our 2009 tax updates classes, I was surprised how many people didn't even notice the change in their paycheck when this went into effect last Spring. I did of course ask the question whether everyone was getting paid more than me. But if a group of tax preparers aren't aware of the problem, some of the more complicated situtations you listed above are certainly going over the head of the average worker. The intended stimulus may turn into a May 2010 anti-stimulus. Great post!

[Kay @ Don't Mess With Taxes]

Thanks, John, for the quick math!

[John Kelly]

Then it would appear that the Making Work Pay Credit has about a 10% error rate (putting it on par with the homebuyer credit). The report also indicates that the errors $200-400 range and will result in a $4 billion hit on filers next year. All back of the envelope.