Important Tax information to be aware of.

An accountant (posted under the name Heidi) on a forum I was reading, posted this information about the stimulus money that we are now seeing on our paychecks.  On your 2009 return, if you either individually or as a couple make more than $30,000 a year, you really need to be aware of this, and may want to adjust your withholding (W-4) accordingly.  Contractors who work 1099 may also benefit from this knowledge and adjust (depending on the rate change magic the IRS has done).  Not being an accountant myself or being familiar with the tax laws per se, I’m not sure.  Please comment if you understand the 1099 effect, if there is one at all. Knowing the IRS code and rate changes that will effect income taxes for 2009 and tips on avoiding penalties and fees that could result, is in my opinion, very important.  I am grateful to this accountant for this information. I am posting this as a service to my readers.

Comment follows:

sigh… so, for those of you who still have jobs… I don’t know how many people noticed, but in mid-December, the IRS issued a new withholding tax table dropping the withholding tax by approximately $2/exemption claimed on your W-4 form (you saw an additional roughly $13/paycheck in your pocket)… on January 1st they raised the income tax by 2% across the board (for 2008 tax filing) and then gave an additional $1000 of exemption (gee thanks!)… if you made $30,000 or less you saw more money back on your return, otherwise this probably hurt you.  Now they have finished the adjustment for 2009 Stimulus Package  (“Making Work Pay Credit”)  and ALL companies must have it online in your check by 4/15/09.  This credit is $400/person ($800/married joint) and is payable on your 2009 1040 form even if you have no tax due. However, they are giving it out as a reduction in withholding tax. The credit is approximately $2/exemption claimed (again) payable each week for the remaining 40+ weeks of the year. Your paycheck will show (depending on what your W-4 says now) an additional $5-$20 more in your pocket because that same money is no longer going to your withholding tax.  THE PROBLEMS  (yes, there is more than 1):1) If you are claiming married 4 dependents it will be approximately $20/paycheck credit. It will not stop coming to you once it reaches the $800 limit. I repeat – it will NOT stop coming to you once it reaches the $800 limit. And the taxtable WILL NOT take into account whether or not your spouse’s check IS ALSO GETTING THE CREDIT. This credit is designed to FORCE YOU to double dip the credit and have to pay it back next year in April. With penalties and interest. The penalty is 25%. Interest rate for IRS is set at 5%… your double dipped $800 just turned into $1200 that you have to pay back… ouch.2) I received an email from a friend in IRS office in DC… they are raising the tax tables for next year by 4% across the board and raising the bar another $1500 dollars. Again, if you make less than $30,000 this will not affect you – you will probably get more back. If however, you are making more, or COMBINED you are making more, you will be screwed.3) If you have more than 1 job, the credit will be given ON ALL YOUR JOBS. So, if you have a full time job, it will be given there. If you have a part time job, IT WILL BE GIVEN THERE. Both at FULL CREDIT. Again, can you say ‘penalties and interest’?

I know we are ALL hurting for money right now. However, I strongly urge everyone to go in and file a new W-4 form requesting that the additional tax be withheld to negate this new ‘credit’. If the planned raise in rate does not occur, you will get an additional $400/$800 come April next year. But if it does, at least you won’t owe penalties and interest on money you don’t have in the first place… increasing your debt will NOT save you.

I’m sorry if no-one wants to hear this, but as an accountant, I feel a need to pass along the warning… I see the federal government creating a trap to pay for the stimulus and I don’t want to see the unwary walk into that trap blindfolded under the guise of ‘we’re helping you’… friendly fire IS NOT friendly.

An interesting post can be found at GM’s Place!

Hat Tip to Heidi for publicly sharing this information.