Friday, May 8, 2009

Stimulus money - there may be strings attached

You know that extra money that started showing up in your paycheck last month? Uncle Sam may want some of it back.

But first - perhaps within a few weeks - the Internal Revenue Service plans to uncork a big educational campaign to help you figure out how to keep as much of the cash as possible. It will deal with the potentially eye-glazing topic of income tax withholding calculations, but watch for it anyway. Whether you get a refund next year and how much or how little may be riding on it.

"This one's a hot burner issue," said Michael Devine, IRS's spokesman in St. Louis.

Here's the deal. To help stimulate the economy, Congress and President Obama earlier this year ordered a tweaking of tax withholding rules so that most everyone's take-home pay would be maybe $8 or $9 fatter, and work out to as much as an additional $400 2009 tax cut on earned income for single taxpayers and $800 for couples. Multiply that times a few hundred million taxpayers and you get some real stimulus working, the theory went.

But real life isn't always as simple as lawmakers like to imagine. Tax professionals and others soon realized many of the changes might get really messy when we calculate taxes next April. That's because the tax withholding tables employers use to calculate our net pay often don't match our individual situations.

A single worker holding down two $20,000 a year jobs at different employers, for example, might get a $400 bigger paycheck from each of them. But the law only allows that worker to keep $400 of the tax cut. He or she would then have to repay the other $400 next April and either get a much smaller refund or owe a larger balance due.

Many of the nation's 33 million dual income married couples are headed for similar trouble. If they both work and are eligible for an $800 tax credit, their employers could refund them as much as $1,200. Then the couple get to figure how to come up with an unexpected $400 more they'll owe at tax time.

Retirees who work part time to supplement their Social Security income, or who are having taxes withheld from their pension checks, may get nailed too. Both are getting extra money now, but may have to give some of it back later. Social Security and pension benefits don't count as earned income, which is what the $400 and $800 credits are based on.

Details of the IRS campaign to help taxpayers avoid these jams will come soon, said Devine in St. Louis. Meantime, IRS already offers an online calculator at its Web site to help you sort out the right amounts of withholding for your situation.

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