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.