Tax Disaster May Await You

The "Making Work Pay" tax credit will result in tax savings of up to $400 for individuals and up to $800 for couples, depending upon your earned income. The credit is 6.2% of your earned income up to the maximum credit amounts. (Individuals making more than $95,000 and couples making more than $190,000 are ineligible to receive any of this credit.

To implement this tax credit, the IRS adjusted the withholding taxtables, effective April 1, 2009. So employees have started receiving more money in their paychecks. Unfortunately, the withholding tables do not withhold enough money for several groups of taxpayers.

Those at greatest risk are workers with more than one job, retirees who have federal income taxes withheld from their pension payments, college students who are claimed as dependents on their parents' tax returns, and couples who file joint returns and both work.

This problem has been brought to the IRS' attention, but so far, the IRS has yet to figure out a way to fix the problem.

Some examples:

A. A single taxpayer who has two jobs making at least $20,000 at each job. The withholding tables will give her an extra $800, but she will only get a $400 tax credit. This means she'll have her tax refund reduced by that extra $400, or she will have to repay Uncle Sam the extra withholding she has already spent.

B. A married couple with a combined income of at least $50,000 will get the full $800 tax credit. But if they both work and each earns at least $13,000, they will have $400 too little withheld from their paychecks.

C. A college student claimed as a dependent by his parents and making at least $10,000 will have $400 too little withheld from his paychecks. He'll have to repay the whole $400 to the IRS by April 15, 2010.

D. Pension benefits are not earned income. Those taxpayers who have taxes withheld from these benefits will likely have to repay the $250 payment social security is sending them this month (May). If they do qualify for the tax credit, they will have to deduct this $250 from their credit.

What can you do to try to protect yourself? The IRS, recognizing that there is a problem has created a "Withholding Calculator" on its web site, http://www.irs.gov.

Go to the IRS web site and in the Search box on its home page, type in "IRS Withholding Calculator." The first result will likely be a link to the calculator. You will need to have your most recent pay stubs and your most recent tax return. Follow the directions carefully and fill in the information requested. You may find that you will have to fill out a new withholding form, Form W-4, to give to your employer(s), or you may need to get Publication 919, "How Do I Adjust My Tax Withholding?"

This may turn out to save you from possible financial disaster next Spring.

How to Find Your 2008 Stimulus Payment Amount

Everyone who files a 2008 federal income tax return needs to know what he/she/they received as their 2008 Stimulus Payment. If you're like me, you have no idea. Here is an article I wrote that explains how you can obtain this information. How to Find Your 2008 Stimulus Payment Amount.

How to Get an Automatic Sixth Month Extension to File Your Tax Return

If you are having trouble getting your tax return ready to file b y the April 15th due date, you are entitled to receive an automatic 6 month extension to file your return. BUT, you cannot get an extension to pay your taxes. Your extension application must include a payment of all taxes you will owe; otherwise you will be subject to possible penalties and interest. If you don't file you return by April 15th, and don't get an extension, you will be subject to penalties and interest for failing to file your return on time, plus penalties and interest for failing to pay your taxes on time. Here's how to get your automatic extension: How to Get an Automatic Six Month Extension to File Your Tax Return.

Do you qualify for the new Making Work Pay tax credit?

The American Recovery and Reinvestment Act of 2009 created a new, refundable personal tax credit for 2009 and 2010. This credit is known as the "Making Work Pay" tax credit. For those who qualify, the credit equals 6.2% or earned income, up to $400 for individuals and $800 for married couples who file jointly.

Most working Americans will qualify for the credit, but nonresident aliens and taxpayers who can be claimed as dependents by someone else do not qualify. A taxpayer must include a valid social security number on your tax return. Couples filing jointly need only to have one valid social security number to qualify.

The other issue to qualify for this credit is your Modified Adjusted Gross Income. If your MAGI is less than $75,000 for individuals or $150,000 for couples filing jointly you qualify for the full amount ofthe credit. If you MAGI falls between $75,000 and $95,000 for individuals, $150,000 and $190,000 for joint filers, your credit will be reduced on a sliding scale. If your MAGI exceeds the top level, you won't qualify for the credit at all.

Also, some people will receive the $250 payments provided by the Act. These individuals, recipients of social security railroad retirement benefits, or veteran benefits, will have their credits reduced by that amount.

The IRS has issued new withholding tables to account for this credit, so you don't have to do anything. When your employer begins using these new withholding tables in the beginning of April, you should see an increase in your take home pay which will continue through the rest of the year.

If, however, you are self-employed and pay estimated taxes through the year, you can either wait until the end of the year to take the credit or reduce your estimated payments to reflect the amount of the credit to which you are entitled.

More information is available on the IRS web site, www.irs.gov.

Tax Workshop in Cincinnati on 2/26/09

I will be doing a workshop on tax issues for people with disabilities this Thursday, February 26, 2009, from 6:30 pm until 8:00 pm at the Pleasant Ridge Community Center, 5915 Ridge Road.  For more information, or to register, please call or e-mail Sue Schindler at sue@archamilton.org or 513-821-2113 x 112.

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