Tax Tips

Check Your Withholding

This year’s payroll tax credit could leave you owing money next spring.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

December 1, 2009

Beginning last July, Americans’ paychecks got a little bit bigger thanks to the Making Work Pay credit. Tax withholding tables were adjusted to reflect the economic-stimulus credit, which is worth 6.2% of earned income up to a maximum credit of $400 for individuals and $800 for married couples.

But some taxpayers who are enjoying reduced withholding now won’t get the credit when they file their returns. Prime suspects are married couples whose combined income will put them over the eligibility limit for the credit and retirees who saw withholding reduced on pension income but who have no earned income on which to base the credit.

The credit starts phasing out for single filers with $75,000 of adjusted gross income and dries up at $95,000. The phaseout zone for married couples is $150,000 to $190,000. Consider asking your company’s payroll office to up your withholding in December if any of the following situations apply to you: you have more than one job; both you and your spouse work; or you can be claimed as a dependent on someone else’s tax return.

If you don’t adjust your tax withholding before the end of the year, you may have to give some money back, in the form of either a smaller tax refund or a higher tax bill next spring. The Treasury Department estimates that more than 15 million taxpayers could owe taxes they weren’t expecting to pay for 2009 as a result of the Making Work Pay Credit.

Most Social Security recipients and other retirees received a one-time economic-stimulus check of $250 earlier this year. But if they don’t work, they are not entitled to the $400-per-person Making Work Pay Credit. And even if they do work, they are not eligible for the full amount. They can keep only $150 of the tax credit (after subtracting the $250 stimulus check they received earlier). Pensioners who have taxes withheld from their pension checks may also have to return some money if they aren’t entitled to the Making Work Pay credit.

Anyone receiving unemployment benefits should note that the first $2,400 of benefits in 2009 are tax-free but amounts higher than that are taxable. You may want to have some taxes withheld from your unemployment benefits to avoid owing taxes next spring.

There’s still time to use our withholding calculator to compute your proper tax withholding. If you need to change your tax withholding, submit a new Form W-4 to your employer to adjust the last paychecks of the year or make an estimated tax payment for the fourth quarter, due by January 15, 2010.

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