INSIDE WASHINGTON: Taxpayers to get rude surprise

[WriteDown]

Source: AP

WASHINGTON (AP) -- Millions of Americans enjoying their small windfall from President Barack Obama's "Making Work Pay" tax credit are in for an unpleasant surprise next spring.

The government is going to want some of that money back.

The tax credit is supposed to provide up to $400 to individuals and $800 to married couples as part of the massive economic recovery package enacted in February. Most workers started receiving the credit through small increases in their paychecks in the past month.

But new tax withholding tables issued by the IRS could cause millions of taxpayers to get hundreds of dollars more than they are entitled to under the credit, money that will have to be repaid at tax time.

At-risk taxpayers include a broad swath of the public: married couples in which both spouses work; workers with more than one job; retirees who have federal income taxes withheld from their pension payments and Social Security recipients with jobs that provide taxable income.....

Read more: http://finance.yahoo.com/news/INSIDE-WASHINGTON-Rude-apf-15091434.html?.v=1

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Facepalm

[Bill McBlueState]

1. It needs to be easier

for people to look at their gross pay and federal withholding and get at least a first-order estimate of their expected refund or payment.

[high density]

2. So the AP assumes that everybody is in a weird situation

"The average refund was nearly $2,700 this year."

People are, on average, withholding way too much. The new withholding schedule will work out just fine for the average worker. In a country with tens of millions of workers there will never be a formula that satisfies every case out there.

[WriteDown]

3. There sure could be....

Flat tax at 13% with a floor at 30K. No filing taxes. It just comes right out of your check. No crazy deductions or loop holes, and no industry based on filing taxes.

[rhett o rick]

8. Why do you hate America?

:sarcasm:

[havocmom]

9. Flat tax that comes out of your check? Gee the rich will LOVE that one

If you don't actually get a pay check, how does that work?

Paris Hilton Financial Security Act?

[WriteDown]

13. Any income. nt

[havocmom]

16. Yeah, that is an IMPORTANT clarification

Too many people think payroll when the real money is in the bracket above wage earners.

[happyslug]

20. What "Income"?? "Gross Income", "Net Income", "Income from sale of Goods Sold"????

The definition of "Income" is what the dispute is, not its tax rate. If I sell $10,000 widgets for $1 a piece, my "Income from sale of Goods Sold" is $10,000. That can be viewed as "Income". If it cost me 10 cents to produce and sell the Widgets, that is my first permitted deduction for unless I make the Widgets I can not sell them. That is "Income from sale of Goods Sold, less cost of goods sold", and in my example that is $9000. What about the store I have to rent or own to sell the goods? Such "Fixed Costs" also have to be used to reduce the price of what is being sold to get to "Gross Income". Fixed costs can be rent, mortgage payments (Which may or may not be "capitalized" so the cost are spread over several years instead of just one), Tax paid on the property (including the property held for later sale), management costs, cost of transportation and any other cost involved with selling the goods, but NOT directly tied in with the sale of any one good. These "Expenses" are used to reduce Gross Income to Net Income (Often called "Deductions", but the Federal Government have adopted a "Standard Deduction" that everyone can claim,

Once you are down to net Income, the tax rate is easy, even today. Up to $8,025 it is taxed at 10%, from 8,025 to $32,550 the tax rate is 15%, $32,550 to 78,850 the rate is 25%, from 78,850 to 164,550 it is 28%, 164,550 to 357,700, it is $33%, $357,700 and above at 35%. The calculation is NOT that hard, the IRS provides table to do the above calculation based on total income.

For tax rate.
http://www.moneychimp.com/features/tax_brackets.htm

The real problem is NOT the tax rate, but HOW you determined taxable income. That is where the fight is and it is related to the concept of tyeing the cost of selling something to the Income generated by the sale.

Now most people get Income from wages, they are NOT self-employed, but the law permits even wage earners to deduct from their Gross Income cost tied in with their employment (i.e. Union Dues, cost of uniforms etc) but not things that can be used outside of work (Thus it is permitted to deduct the cost of a uniform with your employer's sewed into the uniform but you can NOT deduct the Tuxedo you need for your job since you could use it elsewhere for it had no name of the business on it, the Uniform is presumed by the IRS to be used ONLY when employed, the Tuxedo is viewed by the IRS as something you can wear anywhere).

Now Congress has expanded what is deductible from Gross Income beyond what is related to earning income, but these include the tax deductions for the interest you pay on your mortgage so you can live within commuting distance of your work, the cost of daycare while you are at work, Cost of educational loans etc. These are all very minor deductions when it comes to the Income generated by the Income Tax, but also very popular. No tax reform will affect these deductions that much, and even if Congress drops them all, the total amount that can be collected will be about the same. The reason for this is that main set of deductions are NOT in the Deductions from Gross income but in the Deductions from the Sales of Goods Sold (i.e. related to the cost of such sales) AND the fixed expenses tied in with those sales, not directly tied in with any one sales but part of all of the sales, for example the cost of maintaining a warehouse, whether you sell everything in that warehouse or nothing from that warehouse.

My point is the 13$ Income tax rate is a non-started, for the problem is not the tax rate itself, but what is Income for those people whose sole source of income is NOT wages. To cover those sources of Income you have to permit deductions tied in with that non-wage income. This is where 90% of the Deductions come into play and why 13% rate with no deduction is not workable.

[Chemical Bill]

35. I'll never support a flat tax.

The middle class is what has made America great, and a flat tax is just another nail in the coffin of the middle class.

Bill

[Bluenorthwest]

5. The story did not say everybody, and it assumed nothing

It said 'millions of Americans' and they are correct. It might not be you, but it is millions of Americans. And it is not a weird situation at all, it is just everyday life. Perhaps not your everyday life, but for millions of Americans it is.

[high density]

15. Millions of Americans have unique tax situations every year

I fail to see how Obama's tax cut made that any different. Something new to look out for, but again, that's normal every year. I don't recall the AP crafting these "OMG IT IS A MISTAKE!!!" articles when Bush was cutting checks to get re-elected in 2004.

[L0oniX]

6. Holy shit...

$2,700 ??? Dude ...that's got to be what rich people get back.

[high density]

14. That's the AP's reporting

Is there a reason to doubt it?

[christx30]

23. Back when I was at Dell

I was making $14.02 an hour. Had 1 kid. Got $7,300 back this year.
$2,700 isn't really that much for a tax refund. I also had a lot withheld so I wouldn't owe anything at the end of the year.
Made good sense (or cents) for me and my family.

[Iowa]

25. Just curious... why does that make sense?

Years ago a co-worker came to a staff meeting with doughnuts for all, announcing that she was celebrating a big tax refund. I told her that providing the government an interest free loan isn't really something to celebrate.

If I could pay EVERYTHING at the end of the year, I would. Why would anyone want to provide an interest-free loan to the government, which nowadays has become synonymous with bankers? Is there any good reason to do that, besides not having the discipline to set aside some money in an interest bearing account so it's available at tax time if you owe something? Is there some other reason that I'm overlooking?

And man! $14.02/hour and a $7,300 federal tax refund? Did I read that right? That's a MASSIVE overpayment. At 40 hours/week for 52 weeks that's an overpayment of 25% of your gross income! Why would you do that?

[Psephos]

26. Perhaps to avoid problems like California's decision to send IOUs instead of refunds n/t

[Iowa]

28. No....

If you were concerned about avoiding problems like California's decision to send IOUs instead of refunds, you wouldn't voluntarily send your money to the government and let them hold it. You'd do exactly the opposite.

[Psephos]

32. I misread your position - we're in agreement here n/t

[christx30]

27. Plus my wife

and I were both in school at the time, AND we have two kids that were wonderful little tax deductions. Not to mention that I was the only one working.
And I would rather just have them take whatever they want during the year and I get a bunch back rather than them not take enough out and I have to scramble to find the $300 or so that I owe.
Either way I get screwed (interest free loan vs. having to save up all year... plus I really have no self restraint when it comes to money)
When I lost my job in November, I used my severance pay to get us through from November until I got my new job in January (but since I was just making $8/hour, I needed to sweat it out until I got my tax refund in February, when I paid rent for 2 months and caught up on bills.
I'm making $9/hour now and looking for a second job, because the bills are catching up again. Don't know how we are going to make it through the next couple of weeks. Good thing there is a rooster in a fenced in yard 300ft from my apartment, I guess.

[Still Sensible]

4. Man this is getting old. Another AP article trying to

make it look like the President screwed up. If the goddamn withholding tables are indeed creating a problem, all they have to do is make the correction and reissue them. AP used to be the wire service gold standard, now they are just asshole shills for the right wing.

[Abq_Sarah]

34. It's not the withholding tables that is the problem

The problem is they tried to find a one size fits all deduction in payroll taxes across the board. Not everyone qualifies for the full $400 and if you have a second job, your employer is going to use the IRS tax tables and reduce your withholding even though the second job doesn't qualify.

This was not well thought out.

[DollyM]

7. We would just like to have paychecks to have something withheld from!

Six months without a job, dozens of interviews and pretty much feeling hopeless at this point. I finally broke down and went and applied for food stamps yesterday. We would just be happy to have jobs to bitch about!

[RebelOne]

10. Lovely, just lovely.

I am one of those receiving social security plus have a full-time job. This year I had to pay almost $2,000 in taxes. Seems as if next year, it will be even more.

[bobalew]

21. Full Time Job & Soc Security, Are You Over 65?

Is That 2K In Taxes Over what was deducted from your pay?, Or 2K total? Sounds like you need to adjust your W4 Amount. I know you probably cannot live on the SS alone, though. We are all struggling in some way or other. I will Get a big screwing next year myself, Just because I finally found out what my Loss from a 2005 disaster was, and finally caught up on my taxes. I will need to save back that refund I get, to pay for subsequent years, as all refunds count for income in the year you receive them. Even Income averaging won't help, in it's limited allowance as used now.
Regards, Bob

[hyphenate]

22. I happen to be one who is on disability

and have to get by with that alone. I fortunately have Medicare and fuel assistance, thank goodness, but it's rough, and not likely to get any better. The stimulus check I'm going to be getting is small, and it certainly won't fix anything. It will give me a one trip "spree" that will enable me to get a few "luxuries" like non-generic food, perhaps a new pair of sneakers, a meal out with a friend. It's not easy to live on about 1/3 of the paycheck I would be receiving if I were working, but that boat has already sailed.

[mikelgb]

11. nice, I dodged all those bullets

[change_notfinetuning]

12. My increase in take home pay is already going to pay the higher

interest rate on my credit card. And then some! Obama gaveth and Capital One tooketh. I better start squeezing that turnip now.

[OwnedByFerrets]

17. Our accountant just backed this up.....

and its very disturbing at what COULD happen at tax time next year. We definitely need MORE information.

[quiller4]

19. If my accountant backe this up

I'd be looking for a new accountant.

[OwnedByFerrets]

36. My accountant is just fine thank you.

[quiller4]

18. There are many errors in this story

For one thing, it assumes that most withhold according to the tables. That simply isn't true. The vast majority over-withhold which is why the average taxpayer received nearly a $3,000 refund.

As somebody who has taxes withheld from pension plans, the schedules were never at issue. Each plan asked of us what dollar amount we wished withheld each month and withholding is continuing this year at the rate we specified in 2006.

[damntexdem]

24. Oh, good! I love surprises!

;-)

[Half King]

29. Here are a few of the "surprises"

--A single worker with two jobs making $20,000 a year at each job will get a $400 boost in take-home pay at each of them, for a total of $800. That worker, however, is eligible for a maximum credit of $400, so the remaining $400 will have to be paid back at tax time -- either through a smaller refund or a payment to the IRS.

The IRS recognized there could be a similar problem for married couples if both spouses work, so it adjusted the withholding tables. The fix, however, was imperfect.

-- A married couple with a combined income of $50,000 is eligible for an $800 credit. However, if both spouses work and make more than $13,000, the new withholding tables give them each a $600 boost -- for a total of $1,200.

There were 33 million married couples in 2008 in which both spouses worked. That's 55 percent of all married couples, according to the Census Bureau.

-- A single college student with a part-time job making $10,000 would get a $400 boost in pay. However, if that student is claimed as a dependent on a parent's tax return, she doesn't qualify for the credit and would have to repay it when she files next year.

Some retirees face even bigger headaches.

The Social Security Administration is sending out $250 payments to more than 50 million retirees in May as part of the economic stimulus package. The payments will go to people who receive Social Security, Supplemental Security Income, railroad retirement benefits or veteran's disability benefits.

The payments are meant to provide a boost for people who don't qualify for the tax credit. However, they will go to retirees even if they have earned income and receive the credit. Those retirees will have the $250 payment deducted from their tax credit -- but not until they file their tax returns next year, long after the money may have been spent.

Retirees who have federal income taxes withheld from pension benefits also are getting an income boost as a result of the new withholding tables. However, pension benefits are not earned income, so they don't qualify for the tax credit. That money will have to paid back next year when tax returns are filed.

http://finance.yahoo.com/news/INSIDE-WASHINGTON-Rude-apf-15091434.html?.v=1

[quiller4]

30. I question especially the factoid about retirees

Retirees who have federal income taxes withheld from pension benefits also are getting an income boost as a result of the new withholding tables. However, pension benefits are not earned income, so they don't qualify for the tax credit. That money will have to paid back next year when tax returns are filed.

Between us my husband and I receive 4 pension checks monthly. The rate of withholding hasn't changed on any of them. Two sent out notices telling us that the tables had changed and asking us if we wanted to change our withholding. We live in a senior community. In informal discussions with neighbors I've only found one individual whose withholding was adjusted.

[Half King]

31. The new tables were effective April 1

For pensions, the new withholding tables would not apply until the payout for a full period AFTER the effective date. Since most pensions are monthly, that would not take effect until distributions made in May.

Although the tax credit only applies to wage and salary income (i.e., to "earned income" under the Internal Revenue Code), the IRS has instructed that the new tables are to be used to calculate withholding on pension payments even though pension payments are not earned income. IRS representatives confirm that this approach is intentional.

This will give many pensioners a little more money to spend currently. However, for some pensioners, it may mean that not enough is being withheld from their benefits to cover the tax they owe for the year. While the total dollar amounts of the credit are small ($400 single/$800 married filing jointly), an unexpected tax bill in 2010 nonetheless could be a problem.

Several advocacy groups are raising this issue with the Treasury Department/IRS and in Congress. However, unless and until there is some official change in position, pension funds are required to use the new tables.

Implications for Plan Sponsors
Plan sponsors may want to raise this issue with their legal counsel and discuss whether to notify pensioners about this change.

http://www.sibson.com/publications-and-resources/compliance-alert/archives/?id=1257

[jpak]

33. More anti-Obama horseshit

straight from the source

[OwnedByFerrets]

37. Bull Shit

[alarimer]

38. No shit; I figured this was going to happen.

It was a stupid idea anyway. The thirty dollars or so make no difference to me.