Making Work Pay Too Much
The Treasury Inspector General for Tax Administration reports that more than 15 million people could owe more income tax than usual next April, thanks to the 2009 stimulus act’s Making Work Pay credit (MWP). New withholding tables accommodating the credit are overly generous to people who work multiple jobs, pension recipients, and two-earner couples. For them, withheld taxes will drop more than the credit will cut what they owe the IRS.
And what happens for people who work two jobs or some couples for whom the credit phases out? The amount withheld again falls by more than the credit’s value, so some taxpayers may have too little withheld to cover their taxes
I did miss what the revised income tax withholding tables would mean for pensioners. If you get a pension and the payer takes taxes out of your monthly check, the same tables used for workers specify the amount withheld. With less subtracted for taxes, pension payments went up, but, unfortunately, pensions don’t qualify for MWP. Come April, these pensioners could end up having to return that extra money to Uncle Sam and could even owe a penalty if they haven’t met withholding requirements.
Retirees could ask their pension payers to withhold more tax or they could send the IRS estimated tax payments to cover the shortfall. At the least, they should hold onto the extra money in their monthly pension checks so they’ll have enough to pay their tax bills next spring.
Not surprisingly, some politicians jumped on the issue. Sen. Charles E. Grassley (R-Iowa) complained that “People will get help this year and have it taken away next year and might even pay penalties. It amounts to a bait-and-switch for these taxpayers, and that's not the way tax policy ought to treat people.”
It’s a political tempest in a teapot. The three-quarters of us who get refunds every year will simply get smaller refunds. A few others may have to write bigger checks to the IRS next April. And the IRS promises not to penalize taxpayers whose withholding falls below the required minimum because MWP boosted their take-home pay too much. At worst, lots of people are getting an interest-free loan from Uncle Sam that they’ll have to pay back in April.
In any case, you can’t say we didn’t warn you.