Tax credit gets snagged on IRS withholding tables

By Joe Byrne

As part of the massive economic recovery package instituted three months ago, Barack Obama unveiled the “Making Work Pay” tax credit. Limited to those who earn less than $95,000 a year(or couples who earn less than $190,000), the program will return 6.2% of a person’s earned income. All tax credits max out at either $400 for individuals or $800 for married couples.

The tax credit comes to most people in the form of a small increase on their paychecks beginning April 1, and that small increase should be sustained for the fiscal years 2009 and 2010. Obama has touted the tax credit as one of the big achievements of his first 100 days in office, boasting that 95 percent of working families will qualify in 2009 and 2010.

But a substantial portion of Americans reveling in their $400 tax bonus are going to get an unhappy surprise next April, when the government asks for some of the money back. The IRS recently re-issued an updated version of their tax withholding tables for employers to calculate how much to withhold from employee’s paychecks. The only problem: there are serious flaws that allow some taxpayers to collect more than the maximum tax credit, which will have to be repaid next year.

One scenario made possible by the new withholding tables is overwhelmingly common. A taxpayer working two jobs and making less than $75,000 a year will get two $400 dollar tax credits, one from each employer. The government will take the $400 out of next year’s tax refund. A similar common scenario: if both spouses work and have a combined income of more than $13,000, each spouse gets a $600 tax credit. There are 33 million married couples which have both spouses working.

“The new tax tables will simply mean smaller-than-expected tax refunds next year,” IRS spokesman Terry Lemons told Associated Press. But if someone who inadvertently received $800 instead of $400 calculates their taxes to minimize their tax refund, there is a likelihood of a tax bill next April. Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, told AP, “They need to get the Goodyear blimp out there on this.”

A withholding calculator on the IRS website is aimed at taxpayers and scenarios that will require the government to recover mistaken credit.