Now it’s 2009 and a stimulus package is again available. Only it is different than the 2008 Stimulus Package and may affect some of you in a negative way

Remember the Stimulus check you received in 2008. The $300, $600, or child enhanced payment came in the mail or as a direct deposit. You spent it, saved it, or framed the check for your wall. And when you had your tax return prepared this year you were asked if you received the check and how much it was. Even if you didn’t remember what you received, the IRS had the information readily available on the IRS web site. If you hadn’t received all of the credit you were entitled to in 2008, you were able to receive a credit on the 2008 tax return for the extra amount. The stimulus check you received was really an advance of the Stimulus Credit on the 2008 tax return. If you qualified for the credit it was necessary to file a 2008 or 2009 tax return, even if you wouldn’t otherwise have needed
to file.

Individuals receiving social security benefits, veteran’s benefits, railroad retirement, SSI, and certain federal government retirement benefits should have received payment of $250. But the rest of you are getting your stimulus money a little at a time. The stimulus is coming with every paycheck, one paycheck at a time and will do so for this year and next year. The stimulus payment is an advance of the Making Work Pay Credit. This credit is the lesser of 6.2% of earned income (FICA tax) or $400 for single filers ($800 for joint filers). The credit will be reconciled at the filing of the tax return. You will receive the credit based on your income and your withholding will have been reduced. The credit together with the decrease in withholding should result in zero, in theory. The credit will begin to lose its benefit when income plus excluded foreign income, Puerto Rico, or American Samoa income exceeds $75,000 ($150,000 for joint filers).

In order to get the money circulated, the withholding tables were adjusted after the signing of the tax bill on February 17, 2009. These withholding tables are used by anyone having withholding. Therein lies one of the problems created by this stimulus. Withholding from your pension has been reduced by the use of these tables. This could cause a shortage of withholding when filing the 2009 tax return. Taxpayers receiving Social Security are generally not eligible for the stimulus credit; their version came in the form of the $250 payment. Therefore, the reduced withholding can decrease the refund or cause a balance due. These revised tables with the reduced withholding became available in February and were required to be implemented by April. Therefore, the shortage may depend on how long the reduced tables have been used. You should feel the reduction by looking at the difference in net income on your paycheck. If you received a raise in the mix, you may have to compare the actual amount of withholding taken on the different checks to know exactly what the reduction is. To make this even cloudier, the IRS has now released special tables for pension plans to restore the withholding to its earlier amount. Once again, this year’s shortfall in withholding for those receiving pensions will depend on how long the payor of the pension used the reduced table. Before the end of this year it would be wise to make sure that your withholding is high enough to achieve the refund/balance due result you want, so that adjustments can be made before the filing of your return.

For wage earners eligible for the Make Work Pay Credit, a different set of problems can exist. If you are single and have more than one job, the reduced withholding will come from both jobs. This may result in a reduction in withholding which is double the amount used to offset the credit. This same doubling effect can happen for a married couple. If both husband and wife are claiming exemptions based on the married status, the withholding of each person should be reduced to produce the credit for married couples of $800. If both husband and wife have reduced withholding of $800 for a total of $1,600 and the credit is $800, the couple could have a balance due increase of $800 or a reduction in their refund of $800.

Under the original withholding tables for 2009, a single individual with a biweekly salary of $1,200, claming 0 exemptions would have $151 withheld. The new tables for the same wage would result in withholding of $134. This would be a reduction of $17 per pay period.

That taxpayer would have an annual wage income of $31,200. For an entire year, the withholding reduction would be $17 x 26 which is $442. The maximum credit of $400 is already exceeded. A second job could make the deficiency worse.

A married couple with both spouses making $1,200 biweekly, claiming 0 exemptions would have withholding of $105 each. Under the new tables, the withholding for the same status would be $74 each. Together, the couples withholding would be reduced by $31 each per pay period. Once again, based on an entire year, the withholding would be reduced by $31 x 2 x 26 which is $1,612. The maximum credit of $800 would certainly result in a shocking reduction in the refund or a balance due. The table below displays these two scenarios

Generally, individuals with income in excess of $75,000 and married couples with income in excess of $150,000 will not benefit from this stimulus package. But depending on their income, they may have had reduced withholding which will short them in the end.

If you are concerned about a shortfall, consult with your enrolled agent before the end of the year.