A few weeks ago I wrote a short piece explaining that while even if you think the “Making Work Pay” tax credit of $400 is a bad idea, at least we’re saving money this time by not sending out two letters and a check to every household in America. In short: the stimulus process could’ve been dumber.
In the comments of that article, Laura said:
Yes but now the government will have to reprint and mail out the employee withholding schedules that small employers use to figure up those weekly paychecks. This is why it will take a few months to see that $13. It goes both ways.
I wasn’t sure if Laura was correct about that. I work for a small company, so I figured I’d wait and see.
This morning, my co-workers and I saw our Federal Withholding decrease for the first time as a result of the “Making Work Pay” tax credit. My personal take-home pay is $33 more (we get paid twice a month).
So I asked our Accounting department about the process, and I got this in reply:
It’s actually a change in the Withholding Table. The Table is downloaded from the IRS electronically and then based on your W4 elections and pay scale, the amount will automatically adjust.
Granted, there are probably some companies who don’t do everything electronically, and as a result might need a paper form to be sent, but in our case, and I suspect most other companies, this process didn’t cost anything.
So, in short: the stimulus process could’ve been even yet still dumber.
(More about the Tax Credit from the IRS.)
When I first came across the term “refundable tax credit,” I have to admit I was confused about its meaning. And now that the economic stimulus bill will be signed into law today, I’ve seen that my misconception is shared by others.
A tax credit is a dollar amount that decreases the amount of tax you owe. Normally, a tax credit stops once you reach zero tax liability. However, a refundable tax credit can cause your tax liability to cross over zero, resulting in a refund. This is what is meant by “refundable.” Therefore, even if you owe no tax or had no income, a refundable tax credit might result in receiving a check from the government. In effect, there is a possibility that some people, due to refundable tax credits, may find themselves with an “negative effective income tax rate,” receiving more from the government than they put into the system.
“Refundable” does not mean that you have to pay the credit back to the government over time. Depending on the tax credit, this may be the case, but you wouldn’t be able to tell just by virtue of it being called a refundable tax credit. An example of a refundable tax credit is the Earned Income Tax Credit, designed to reduce or eliminate tax paid by low-income workers.
Refundable tax credits create the possibility for scenarios in which certain families pay no income tax and still receive a payment from the government.
The company has spent the past few months managing expectations. With the economy tanking and our company’s performance following the trend of all other companies in the industry, there won’t be much in the way of annual raises and bonuses this year. (We receive these incentives a few months after the end of the year in which they are earned.)
Barack Obama is prepared to step in with an economic stimulus that might allow workers to take more money home in paychecks. One proposal includes a tax credit advance to taxpayers. Through changing withholding amounts, employees would see this tax break as an additional $150 or more in each bi-weekly paycheck during the first quarter of 2009. For individuals with salaries below $75,000 or couples earning less than $150,000, a payroll tax credit would be offered, $500 for individuals or $1,000 for couples.
Rather than spreading the credit out throughout the year, the proposal calls for accelerating the credit to be fully provided within the first three months of the year.
Giving more money to taxpayers hasn’t really worked as an “economic stimulus” so far. This seems to be a unique way to approach the problem of stimulating the economy, but I’m not sure it will work on its own. Nevertheless, I can understand how this would be a welcome plan in a year in which companies can’t or won’t offer pay increases. The mantra heard most often now is that one should just be lucky to have a job at all.
Obama’s paycheck bonus, Jeanne Sahadi, CNN Money, December 30, 2008
At the age of 32, with our household income breaking the $100,000 (US) mark for 2007, I was finally convinced by family and friends to take our tax preparation to a specialist, a Certified Public Accountant (”CPA”). I was always wary of the idea, primarily because since I started filing taxes at age 16, I would usually get a refund of about $200 to $500. And from asking around, I learned that the average price for a CPA to do your taxes was around $250. My taxes were never more complicated than looking at my W-2s (most years there are multiple W-2s, but don’t worry, I’ve never really been fired), and copying numbers from the boxes on the paper into the boxes on the screen.
When we filed our taxes for 2006, now that we were married and filing jointly, things got a little more complicated. We both purchased hybrid cars that year and were expecting the associated tax credits to supply us with a big refund on the order of around $6,000, but the refund we saw was actually closer to $1,200. In 2007, we became homeowners for the first time, which, along with marriage, is also supposed to give you some credit around tax time.
My wife reads. She devours information like Robert Redford in Three Days of the Condor, and she generally surrounds herself with brilliant people. So when she once again floated the idea of using a CPA to help us with our taxes, especially given that the previous year didn’t work out like it was supposed to, I finally conceded. We picked a local independent CPA based on location, and the fact that his web site was usable, accessible, and provided an RSS feed. We’re geeks like that.
Before I went to see our CPA, I took our tax information and plugged it into TaxACT Online, which doesn’t charge you anything until you actually hit the “file taxes now” button, to see what the numbers would look like. I got the shock of my life when I saw that we were projected to owe the IRS over $6,000. This is roughly the same number of dollars I was expecting to see, but in refund form, not as a debt. We’re married! We bought a house last year! How can this possibly be?
Well, I’ll explain in an upcoming entry what I learned about W-4 forms and marriage, but suffice it to say that I was even less inclined to go see a CPA and pay him (in our case it’s a man) hundreds of dollars to tell us that we owe the IRS $6,000. But I’d made a commitment, and there was always a chance that maybe I transposed a number or two, or misunderstood some part of the tax code, and he could fix it.
To make a long story less long, he wasn’t able to fix it, ’cause nobody had really done anything wrong. What I did get from him, however, was two hours’ worth of really good advice. He took a genuine interest in our finances, aligned himself with our point of view about how life should be lived, and gave us specific tasks to do in 2008 that would make filing taxes next year as painless as possible.
I wrote everything down, of course, and will be sharing bits and pieces of his advice with you in the future as it comes up. But the end result is this, unless you’re single and renting, with no investments to speak of, I think it’s worth the cost to hire a professional to help you with your taxes. As of this writing, it’s still early March, and there’s plenty of time to find someone to help you prepare for next year. Just try Googling “certified public accountant [your zip code]” and poke around until you find someone trustworthy, preferably with a blog attached to their site.
My name is Smithee, and I’m an almost-total personal finance newbie. My wife and I bring in over $100,000 a year, and we have no savings at all. Just like Flexo when he started this site, we’re writing here in order to keep ourselves accountable, and to turn our lives around.
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