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2010 CCH Whole Ball of Tax
What Do You Mean, I Owe? CCH Outlines the Potential Cost of the Making Work Pay Credit
Dual-income Couples, Moonlighters and Working Seniors May Have Higher Tax Bills, While Self-employed Get a Bigger Break
(RIVERWOODS, ILL., January 2010) – People planning to take a vacation or buy a big-ticket item with the proceeds of their tax refund may want to finish their 2009 taxes first, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). This is because millions of taxpayers will receive a smaller refund – or potentially owe money – as a result of not adjusting their withholding in light of the Making Work Pay Credit.
“People get used to getting a refund that grows slightly year to year, and many also have the tendency of spending the refund before they actually have it in hand,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM.
The Making Work Pay Credit was enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA), signed into law in February 2009. The credit is equal to 6.2 percent of wages up to a maximum of $400 for a single taxpayer, $800 for a joint return. It begins to phase out at adjusted gross incomes (AGI) of $75,000 for single filers and $150,000 for joint filers and decreases to zero when AGI hits $95,000 for single filers and $190,000 for joint filers.
Where Making Work May Cost
The IRS estimates that the Making Work Pay Credit lowered tax-withholding rates for 120 million households.
However, it also poses an unexpected problem for several groups of workers, including those who hold multiple jobs, are part of a dual-income family or collect Social Security or a government pension. The millions of people who meet one or more of these criteria and did not adjust their withholding may end up with a smaller refund or even owing more this tax season.
Workers began receiving the credit through a few dollars added to each of their paychecks starting last April based on new withholding tables issued by the IRS. The tables did not take into account, however, issues that could arise for those groups noted above. As a result, both spouses in a dual-income family may have each received an $800 credit, when they were only eligible for a combined credit of $800. A single filer holding two jobs may also have received a $400 credit from each job while he was only eligible for a single $400 credit.
Adding to the complexity, many individuals in these situations may only be eligible for partial credit or may not be eligible at all based on their AGI. For example, a single filer with an AGI of $70,000 from one job would be eligible for the credit; however, if he had a second job, adding another $40,000 to his AGI, he’d no longer be eligible for any credit – even though he may have erroneously received a $400 credit from each job.
The ARRA also provided a one-time $250 economic recovery payment to individuals on fixed incomes, primarily Social Security recipients, and a one-time $250 government retiree credit to retired government workers. The Making Work Pay Credit is supposed to be reduced by the amount of the recovery payment or government retiree credit. However, a Social Security recipient who also has a job may have received the $250 economic recovery payment and the full $400 Making Work Pay Credit even though they were only entitled to $150 of the Making Work Pay Credit. As a result, they’ll have to repay the $250 when they file their taxes.
“Many seniors that returned to the workforce to help replenish their savings may now have to take money they thought was savings and pay it back to the IRS,” said Roth.
Potential Good News for Self-employed
Tax season may be brighter for the self-employed because of the Making Work Pay Credit. Many self-employed workers, assuming an income similar to the prior year, simply divide their previous year’s tax obligation by four to determine their quarterly estimated tax payments for the following year. Entrepreneurs following this process would not have been claiming the credit throughout 2009 and may have over-withheld. As a result, they may have a substantially lower tax bill.
Determining if You Owe and Making Sure You Don’t for 2010
Taxpayers will need to use the new Schedule M tax form, Making Work Pay and Government Retiree Credits, to reconcile the amount of the credit they received through reduced withholding with the amount of tax they owe. Self-employed taxpayers can use the same form to claim the Making Work Pay Credit if they have not taken it during 2009.
As the Making Work Pay Credit is available in both 2009 and 2010, Roth advises taxpayers to learn from 2009 so that they can make sure they’re in a better situation for their 2010 taxes, and not facing potential additional penalties.
“The likelihood is that most people will avoid penalties for under-withholding for 2009 by falling within the safe harbor rules. But that may not be the case if they under-withhold for a second year,” said Roth.
Under safe harbor, taxpayers are generally safe from a tax penalty for under-withholding if they paid at least 90 percent of the taxes they owed during the applicable tax year through withholding (or estimated taxes in the case of self-employed) or they paid more than 110 percent of the amount they owed in the previous year.
“If you under-withheld for 2009, determine what your 2010 income will be, adjust your withholding accordingly and file a new W-4 with your employer,” said Roth. “You may need to give up an exemption or have your employer withhold a few extra dollars from your paycheck, but that’s better than facing a penalty next year.”
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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