Monday, April 27, 2009

THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 – WHAT’S NEW FOR 2009 – PART II

The centerpiece of the tax provisions of BO’s “stimulus” package is his Making Work Pay Credit. Every taxpayer, except as listed below, with “earned income” (i.e. W-2 wages and net earnings from self-employment) will get a credit (dollar for dollar reduction of tax) of up to $400.00 (which becomes $800.00 for a joint return) on their 2009 and 2010 tax returns.

The credit is calculated as 6.2% of earned income.

The credit is not available for non-resident aliens, those who can be claimed as a dependent, or estates or trusts. You must have a valid Social Security number (at least on spouse on a joint return) to get the credit.

The credit is “phased-out” at the rate of 2% of the taxpayer’s Adjusted Gross Income (AGI) in excess of $75,000 for singles and $150,000 for joint filers – the same phase-out range used for GWB’s 2008 rebate checks and the second chance “recovery rebate credit” available on the 2008 tax return, although a smaller percentage (2% instead of 5%). The credit is completely phased out if AGI exceeds $95,000 or $190,000 respectively.

There is no additional credit based on “qualified” children as there was with GWB’s “stimulus” rebate. The most a family can get is $800.00 ($400.00 if a single parent).

The federal withholding tables have been revised accordingly to reflect this credit – so workers will see about $13 per week extra in their paychecks. The IRS asks that employers start using these new tables as soon as possible, but no later than April 1, 2009.

Big whoop!

It is obvious that the 2008 rebate checks were a very expensive fiasco – costing the government billions of dollars both in actual out-of-pocket expense and in uncollected outstanding taxes (as the IRS had to take employees away from collecting back taxes to man the phones to answer the multitude of questions from taxpayers), and doing nothing to “stimulate” the economy. See my guest post at taxguy “That Was the Economic Stimulus That Was”.

However, a lump-sum check of $1,200 to $2,100 or more (depending on family size) could be put to good use paying down bills or credit card debt or as an investment. Granted, as my mentor Jim Gill would say when discussing a small refund, “Better in your pocket . . . {than in the pocket of the government}”, $13.00 per week will be simply “lost in the shuffle” and not make any significant impact on anything. What will it buy – a night out for the family at McDonald’s?

At least this “stimulus” payment saves the government the cost of distributing the money - it is much more cost-efficient to have all the work done by employers. But making the pay-out through revised income tax withholding tax tables will result in many unintended consequences.

Andrea Coombes points out the major problem in her article “More Like a 'Make Work' Credit: New Making Work Pay Credit Makes a Check-Up on Your Withholding Essential” at MarketWatch -

But withholding tables are a blunt instrument, unable to precisely assess taxes for millions of taxpayers' unique situations. And employers who use the tables don't know workers' complete situation, such as whether an employee has a second job or is married to someone who also works. That means some workers will end up with more cash than they're eligible for under the new credit”.

She also points out that, “People claimed as dependents aren't eligible for the credit, but if they work it may show up in their paychecks.”

Many taxpayers will find themselves unpleasantly surprised at tax filing time next year by an unexpected balance due to “Sam” resulting from under-withholding.

Also hit with unintended consequences are retired taxpayers who do not have earned income but receive pensions. I have seen the effect on several clients already. While some retirees request a flat % withholding on their pension distributions (i.e. 20%) there are also many who use the withholding tables, claiming “Married 0” or “Single 1” just as they would if they were working. These taxpayers are not entitled to the Making Work Pay credit – but the withholding on their pensions, often just enough to cover their tax liability, will be reduced by over $50.00 per month due to the revised tables.

A significant number of individuals, working and retired, will need to revise their W-4 or W-4P to request additional withholding in order to offset the MWPC adjustments.

Totally self-employed individuals would, in theory, adjust their quarterly estimated tax payments by $100.00 or $200.00 per quarter to take advantage of the advance payment of the credit.

The credit of 6.2% comes from an earlier, non-BO stimulus proposal known as the “payroll tax holiday”. 6.2% is the tax rate for withholding for the Social Security component of the “FICA” payroll tax. The “payroll tax holiday” idea called for suspension of Social Security withholding on the first $XXXX of wages – sufficient to equal the specific dollar amount of the proposed rebate.

This method would not affect income tax, and therefore would not require a change in the income tax withholding tables. It would avoid the problem faced by retirees, but would not avoid “double-dipping” by employees with more than one job during the year or the problem of working dependents.

Recipients of Social Security, SSI, Railroad Retirement, and Veterans Benefits will receive a one-time “Economic Recovery Payment” of $250.00 sometime before the end of May (my parents just received a notice from SSA about this payment). This is a separate check issued by SSA, RR or VA. If your benefits are directly deposited to a bank account so will this $250.00. Those who are also entitled to a MWPC due to employment or self-employment must reduce their $400.00 credit by any such “Economic Recovery Payment” – so the most an employed Social Security recipient gets is $400.00 and not $650.00.
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As the notice my parents received points out "You do not need to take any action to get this payment".
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The ERP is for 2009 only. There does not seem to be any income phase-out for the $250.00 payment. It is available to recipients of one of the 4 sources who were eligible for benefits for any one of the three (3) months prior to the February 17 enactment date (i.e November or December 2008 or January 2009). Eligible ERP recipients are asked to notify the appropriate agency (SSA, RR, VA) if a payment is not received by June 4, 2009.

Again big whoop – but still “better in your pocket . . .”!

The IRS has a Q+A section for the Making Work Pay Credit at its website (click here), and the SSA website has a page on the Economic Recovery Payment (clock here).

So what are you going to do with your $13.00 per week “windfall”?

TTFN

3 comments:

TomK said...

What a screw up this is going to be come next tax season:

http://finance.yahoo.com/news/INSIDE-WASHINGTON-Taxpayers-apf-15094808.html?.v=2

Anonymous said...

$13.00 a night out at McDonalds - you obviously have no children or grandchildren. 13 bucks will pay for you and momma and momma don't want McD.

Robert D Flach said...

Anon-

You are correct about no children or grandchildren (that I know of). There is no Mickey D "pet" meal yet.

But doesn't McDonald's have a special $1.00 menu?

As for momma - McDonald's is still better than having to cook.

TWTP