Tax Savings Newsletter -

Tax Warning for Next Year (Part I)

Millions of couples and retirees may have to repay some of Obama's tax credit.

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 who will be mostly affected are: 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. The Internal Revenue Service acknowledges problems with the withholding tables but has done little to warn average taxpayers.

For many, the new tax tables will simply mean smaller-than-expected tax refunds next year. The average refund was nearly $2,700 this year, but taxpayers who calculate their withholding so they get only small refunds could face an unwelcome tax bill next April, so check your federal withholding to make sure sufficient taxes are being taken out of your pay.

If you are married and both spouses work, you should consider having taxes withheld at the higher rate for single filers. If you have multiple jobs, you might want to consider having extra taxes withheld by one of your employers. You can make that request with a Form W-4. Also, the IRS has a calculator on its web site to help taxpayers figure out their proper withholding and so do many private tax preparers.

Another alternative to lower your tax bill next tax season instead of having more taxes withheld is to take advantage of tax savings vehicles such as retirement plans and health saving accounts. Also, going back to school, you can take advantage of educational tax credits that can lower your tax bill as well as increase your earning power.

Sharif J. Small, '05

S.J.S. Financial Firm