Taxpayer asks:
Thanks for your blog entries on the Making Work Pay tax credit – very helpful. I’m wondering if the tax tables have been “fixed” for 2010 so that people with more than one job or spouses who both work don’t get the tax credit twice. About 3 – 4 months ago the story broke that the tax tables weren’t set up correctly by the US government. Some people got more of a tax credit than they should have and will therefore not receive as much money back in a refund or they may even have to pay the US government for taxes. The latest information on the IRS website I can find leads me to believe that the tables won’t be “fixed” for 2010, but employees should instead adjust their withholdings. Forgive me if I’m getting some of the details wrong. Below is a link to an article that references the problem I’m trying to explain.
San Francisco Chronicle
http://articles.sfgate.com/2009-11-17/business/17182034_1_tax-credit-refund-couples
Thanks!
Taxgirl says:
Thanks for your email. I have a bit of a different perspective on this issue: I think the media has reported this irresponsibly. This issue isn’t *new* and it didn’t *just break* – no matter how the various media outlets are attempting to spin it. We’ve know about it since before the credit went into effect – I even blogged about it in March 2009 before the withholdings began.
In November 2009, the media tried to make a story out of it by suggesting that the government had a made a mistake on the tables. The NY Daily News ran the story with the headline “15M+ taxpayers could unexpectedly owe taxes due to gov’t mistake on Making Work Pay tax credit.”
That same month, Yahoo even appeared to revamp an earlier version of their story, titled “Stimulus surprise: 15 million people may owe taxes” from a piece they originally released in May (I blogged that they were late when they ran it in May). Clicking on the link from Yahoo’s prior story, formerly here, now gives you a 404 error. Hmm.
So here’s my take: It’s not a mistake and it’s not newsworthy. It smells a lot like yellow journalism. It’s definitely bad journalism.
The IRS has been aware that taxpayers who don’t qualify for the credit – but still work – may have too little withholding taken out of their checks. This is because Congress said, “Yes, let’s give a credit but let’s leave out these people: the rich, working dependents, retirees and disabled people…” That created a hole that couldn’t possibly be addressed in the tax tables. It also couldn’t be addressed by your employers – can you imagine an employer the size of say, Ford, checking in with every single employee to figure out their withholding situation? So, the IRS urged employees to check their withholding if certain circumstances (multiple jobs, double-income households with high earners, dependents, and retirees who work). They sent out press releases, issued podcasts, put videos on YouTube – more than once – and directed taxpayers to the online withholding calculator.
Some news outlets – like PBS – (and my fellow tax bloggers) actually reported the potential problems with the program as the withholding began. Others chose to wait for the opportunity to report remarkable headlines later.
To be fair, I’m not a fan of the credit. I think it’s too complicated. And I wasn’t a fan of the rebate checks a few years back either – same issue, too complex, too many rules, and exemptions. I think these retroactive or midyear tax credits from the current Congress (and those before this one) are political pandering to make you think you’re getting something. I find it wasteful, quite frankly.
But, that said, let’s call this particular credit what it is: it’s not a goof, error, mistake. It’s a tax law meant to benefit as many taxpayers as quickly as possible with minimum impact. And despite the fact that the media is making the anomalies in the credit to seem like a huge big deal, it’s not. On the high side, it’s estimated that the potential for over-withholding will affect fewer than 10% of taxpayers.
The Treasury did revise the withholding tables for 2010 to try and accommodate the effect of the credit for those subject to a phaseout. However, those tables will still not address the issue of those receiving pensions who work and joint filers with multiple jobs. That’s something that taxpayers will have to work out for themselves – much the same way that you make adjustments when you have a baby or buy a house.
While I sympathize with taxpayers who may find themselves surprised this season, I think anger towards the IRS or Congress is a bit misguided at this point. Blame the media, who have had the resources to get the story out to taxpayers since March 2009 but thought that it made better news at the end of the year. It can’t just be me who finds it more than coincidental that the story *broke* again during November and February sweeps…
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
Thank you so much for your quick response. I really appreciate it! Great summary of the important information. I love your blog – thanks a ton!!
Thank you HR!
I agree that the IRS didn’t make a goof–once again, they did the best they could to implement Congress’ crazy quilt tax policy.
However, I do think Congress is guilty of all kinds of goofs in creating the overall crazy quilt tax policy that makes it really difficult to use withholding calculators intelligently. So many different bed buffaloes lurking in the tax code makes it very hard for people to predict their tax liability accurately. Different kinds of income are taxed in very different ways (wages are taxed differently from self-employment which in turn are taxed differently from interested which in turn are taxed differently from capital gains and dividends which in turn are taxed differently from “other income.” And don’t get me started about all the different ways that different kinds of retirement income can be treated for tax purposes!)
Taxpayers who wound up owing money this year due to the withholding changes include many senior citizens and disabled people. Some speak English as a second language or have difficulty reading small print or cognitive difficulties. It is completely unreasonable to have a tax system that demands so much attention to minute details that even our top government officials have had difficulty complying with it.