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Could New Stimulus Plan Actually Cost You Money?

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By Richard Burnett

hourglass-web1RISMEDIA, April 21, 2009-(MCT)-Wage earners beware: One of the federal government’s new tax breaks, designed to put more take-home pay in your wallet now, may take a bite out of your wallet next spring. Under certain conditions, the extra cash you’ve started seeing in your paychecks could shrink your refund or boost the size of the check you have to write when you file your 2009 tax returns next year.

How can that be? Simply put, your employer may be giving you too big a break on your withholding taxes under the government’s “Make Work Pay” stimulus plan if you’re a two-income couple or an individual working two jobs.

Working couples, for example, qualify for a tax credit of as much as $600 this year, doled out in small amounts in each paycheck through lower payroll-withholding rates required by the government. Ideally, each spouse’s employer should lower the withholding rate enough to generate a $300 tax credit for each person.

But that’s not what is happening.

The employers of both couples are applying the lower withholding rates, which means the couple will actually have a combined $1,200 left in their paychecks between now and the end of the year. When they do their taxes next spring, they could find they owe more, or are getting back less than they expected.

Quick cash to aid economy
Why are companies doing this? Well, it’s efficient and quick. They don’t have to take extra time to verify your spouse’s employment status. And the government wants it that way.

Uncle Sam isn’t nearly as concerned about the tax consequences for you next spring as much as he is in getting extra spending money into people’s hands now in hopes of boosting the economy, which is in its worst recession in a quarter-century.

“We pretty much agree with the government’s idea of doling out stimulus the quickest way possible, by way of reduced withholding taxes,” said Steve Mezistrano, chief of government relations for the American Payroll Association, which represents U.S. employers. “But there is some fallout to deal with, especially if you are a dual-income married couple or individual who works two jobs.”

Fortunately, you can avoid the problem by doing two things:
-First, figure out how much you should have withheld from each paycheck to fulfill your estimated 2009 income-tax bill. Many financial websites will help you do this.
-Second, have your employer adjust your payroll withholding to ensure you’re getting at least enough tax taken out each pay period to cover your estimated tax total. Check out the Internal Revenue Service’s 2009 “Withholding Calculator” at irs.gov under the “Individuals” section. This will require a little math and filling out a new Form W-4 for federal withholding – something many people simply won’t do because they regard it as an inconvenience.

If you work two jobs, you’re vulnerable
Working couples are not the only ones vulnerable to the potential problem. The same thing applies to individuals with two jobs. Such workers should be aware that each of their employers will reduce their federal income-tax withholding by as much as $400 between now and the end of the year – or up to twice as much as the stimulus program intended.

Also, some taxpayers not eligible for a withholding break may get one, anyway, such as young workers listed as dependents on someone else’s tax return, people who get pension payments (which are subject to withholding tax) and workers who receive “economic recovery checks” through Social Security or Veterans Affairs.

In those cases, too, employees should make sure the extra cash in each paycheck doesn’t put them in hock to the IRS.

Financial advisers say the best thing to do is to set your withholding tax at just the right level for income-tax purposes. That means you should owe the IRS only a little, or get just a small refund, when you do your return.

Saving beats withholding
Meanwhile, you have a little more cash in hand – for saving, investing, bill paying, shopping or committing other acts of economic stimulation.

“Even if you put it in a passbook savings account, you’d at least get some interest on it,” said Frank Arnall, an Orlando financial planner with United Planners Financial Services of America. “And that’s better than giving it to the government as an interest-free loan.”

Still, a lot of people continue to “over-withhold” taxes from their paycheck because they prefer to get a large refund each spring rather than write a check for a balance due. They view it as a sort of “bonus” or savings program, albeit one that doesn’t pay interest.

“Some clients just prefer to get that refund,” said financial planner Dianne Webb of Maitland-based Stonebridge Financial Planning Group. “But many others don’t want to give the government any money for any period of time if they don’t have to.”

Copyright © 2009, The Orlando Sentinel, Fla.
Distributed by McClatchy-Tribune Information Services.

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