7 Misconceptions About the Stimulus

Since President Obama signed the economic-stimulus package into law February 17, I have received many questions about its provisions. And I've noticed that there are a lot of misconceptions about the plan. Here's the lowdown.

Misconception #1: Most people will get their stimulus money as a check this year.

Instead of receiving a check from the government, most single taxpayers will see an adjustment to their tax withholding in their paychecks in 2009 and 2010, giving them about $45 extra per month for the rest of this year (married workers will receive an extra $65). If you're self-employed, you can adjust your quarterly tax payments to benefit from the tax credit. Then you will claim the credit when you file your 2009 tax return next spring, bringing your tax bill in line with your reduced payments. See How the Self-Employed Get Stimulus Money for the details.

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The stimulus also provides a one-time payment of $250 to recipients of Social Security, Railroad Retirement and Veterans Administration benefits.(People who applied for any of these benefits for the first time after January 31 don't get the money; only those on the rolls in November or December 2008 or January 2009 are eligible.) You'll get the money electronically or by check, depending on how you receive those benefits. Retired government employees who don't receive Social Security won't get a check, but they will get to claim a $250 tax credit when they file their 2009 returns next spring.

See How Will I Get My Stimulus Money? for more information.

Misconception #2: The adjustment to withholding will have to be paid back when you file your tax return next year.

Wrong (in most cases). The stimulus is actually a tax credit of 6.2% of taxable wages in 2009 and 2010, to a maximum each year of $400 for single taxpayers and $800 for married couples filing jointly. The credit is refundable, which means that you can still receive the full credit even if it is worth more than your total tax liability.

Paychecks are being adjusted now to get more money into the economy faster. You'll claim the credit when you file your return next year, so your tax bill should adjust in line with the stimulus money (and you might get some extra money at tax time if your withholding wasn't adjusted enough to account for the extra credit during the year, which may happen for some married people in single-earner households).

But not everyone qualifies for the credit. It begins to phase out for single filers with adjusted gross incomes of $75,000 or higher, or $150,000 for married couples filing jointly, and it disappears entirely for single filers with AGIs of $95,000 or more, or $190,000 for joint filers.

But, note this: Some taxpayers will effectively have to repay reduced withholding now with higher taxes – or smaller refunds -- when they file their returns next spring. This applies to older workers who are still on the job while receiving Social Security benefits and workers who are still claimed as dependents by their parents (think high school and college students with summer jobs). See 5 Things to Know About the 'Making Work Pay' Tax Credit for more information.

Misconception #3: The first-time home buyer's credit needs to be repaid.

Not necessarily. You may not have to repay the credit, depending on when you bought the house.

If you buy a house between January 1, 2009, and December 1, 2009, you could receive a credit for 10% of the home's purchase price, up to $8,000. This credit does not have to be repaid as long as you own the home for at least three years.

If you bought a first home between April 9, 2008, and December 31, 2008, you are eligible for a tax credit of 10% of the home's purchase price, up to $7,500 -- but the credit must be repaid over 15 years, starting two years after you claim the credit. If you sell the home before you finish paying back the credit, the balance is due in full the year of the sale.

The 2008 and 2009 credits begin to phase out if your modified adjusted gross income is more than $75,000 (or $150,000 if you're married filing jointly). The credit disappears entirely after your income reaches $95,000 if you're single, or $170,000 if married filing jointly. You are considered a first-time home buyer if you (and your spouse, if you are married) didn't own a primary residence in the three years leading up to the settlement date of the new home. The credit does not apply to rental property and vacation homes.

Misconception #4: You can't get the 2009 first-time home-buyer tax credit until you file your tax return next year.

Actually, taxpayers who buy a first home in 2009 do not need to wait until they file their 2009 return (by April 15, 2010) to benefit from the credit. To get the money into the economy faster, the federal government is giving you a choice of claiming the first-time home-buyer credit on either your 2008 or your 2009 tax return.

What if you buy after you file your 2008 return? No problem. You can file an amended return using Form 1040X. Claiming the credit on that form will trigger an $8,000 refund check from the IRS.

There's even a way to benefit from the credit even before you buy your first home. If you plan to buy by the November 30 deadline, you can reduce withholding on your paychecks right away. The increased take-home pay could help you with the down payment. File a new W-4 form with your employer to adjust your withholding. (And remember to re-adjust your withholding again next year.) For more about how to reduce withholding see Get Next Year’s Refund Now.

See Understanding the '08 and '09 Home Buyer's Credits for more information about the forms you have to fill out to claim the credit.

Misconception #5: You need to apply through the government to get the COBRA health-care subsidy.

Contact your former employer, not the government, to take advantage of the the valuable new federal subsidy for continued health insurance under the law known as COBRA. If you were laid off since September 1, 2008, the government will basically pay 65% of the cost of your health insurance. You’ll pay the other 35%. (Your ex-employer will actually pay the subsidy and be reimbursed by the government.)

If you were laid off on September 1, 2008, or later but didn't sign up for COBRA coverage coverage -- or let your coverage lapse because you couldn’t afford it -- you get a second chance to elect COBRA and benefit from the subsidy. You should receive a notice from your former employer soon, or contact your former employer to find out about the steps for signing up.

There are income limits on this subsidy. If your adjusted gross income for 2009 exceeds $125,000 (or $250,000 on a joint return), you’ll have to pay back all or part of any premium reduction when you file your tax return next spring.

For more information about the COBRA subsidy, see Get COBRA Coverage for Less.

Misconception #6: You can receive the COBRA subsidy the entire time you're covered by COBRA.

Federal law requires most companies with 20 or more employees to let former employees keep group health-insurance coverage for up to 18 months after they leave their jobs. But the 65% COBRA subsidy lasts for only nine months. After that, the premiums will jump back to the full price - and the average employer health-insurance plan costs $12,680 per year for family coverage, according to the Kaiser Family Foundation.

If you have health issues, COBRA may still be your best bet despite the hefty price tag. But many people can find a better deal by buying their own health insurance. You can get price quotes for individual policies at eHealthInsurance.com, or find a local health-insurance agent at the National Association of Health Underwriters Web site. Check out your options at least one month before your COBRA subsidy expires so you'll have plenty of time to find out how much an individual policy would cost.

The subsidy ends if you find a job that offers health-care coverage or you become eligible for Medicare. And COBRA does not apply if your former employer stops offering health coverage to current employees or shuts down entirely. For more information, see Stay Covered After a Layoff.

Misconception #7: The number of weeks you can receive emergency unemployment benefits has been extended.

In most states, the stimulus does not provide additional weeks of benefits for people who use their 33 weeks of emergency unemployment-compensation benefits; it just expands the dates that the program will be available.

A federal law passed last year provides an extra 20 weeks of emergency unemployment compensation to workers who exhausted their regular unemployment benefits, plus an additional 13 weeks of extended benefits for residents of states with high unemployment rates (contact your state unemployment-benefits office for details about your state's rules).

The emergency unemployment-compensation program was scheduled to expire on August 27, 2009, and the last day to apply for benefits was originally set to be March 31, 2009. As a result of the stimulus law, unemployed people who exhaust their regular state benefits now have until December 31, 2009, to apply for extended benefits and can receive compensation until May 31, 2010. California, however, did choose to use some stimulus money to extend unemployment benefits for up to a total of 79 weeks for some residents.

For more information, see More Answers About the Stimulus and Unemployment and What You Need to Know About Unemployment Benefits.