Watch Out For Your Withholding Adjustment!

As part of the tax law passed in February, many taxpayers will be entitled to the new “Making Work Pay” credit.  Even though this credit will be calculated in the 2009 tax return, the federal income tax withholding tables used by employers have been adjusted to reflect this new credit in an effort to get the money into working taxpayers’ hands right away.

However, there is a potential hazard.  Since the adjustment is based upon each individual’s earned income from a particular employer, it does not make allowances for multiple job incomes, spousal income, or other forms of income.

The result could cause a taxpayer’s withholding to be reduced inappropriately, which may substantially reduce his or her refund at the end of the year or, worse yet, cause an unexpected tax due.

You are cautioned to check your federal tax withholding on your paystub before and after the change.  Determine the amount of the withholding reduction for each paycheck, and then based on the number of paychecks for the year with the reduced withholding amount, determine the amount of the reduction for the year.  If you hold multiple jobs or have a spouse who also works, determine the total reduction for all of the paychecks. 

Now compare this with the allowable credit, which is 6.2% of your earned income or a maximum of $400 for a single individual and $800 for joint filers.  The credit phases out for higher-income taxpayers, so you may not even be entitled to the maximum credit.  The phase-out is 2% of the taxpayer’s modified adjusted gross income in excess of $75,000 ($150,000 for joint filers) and is totally phased out at $95,000 ($190,000 for joint filers).  

So, if your withholding adjustment exceeds the credit, that excess will reduce the refund amount or add to the tax due when the 2009 tax return is prepared.  If you feel the adjustment is excessive for your circumstances and would like this office to run an analysis and/or help you make an adjustment, please call to make an appointment.

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