…and people need to be made aware, particularly if they are married and file jointly, or if they are single and hold more than one job (including part time).
The intention was good. The idea was to give every working American a tax credit of $400 and every working married couple a tax credit of $800. There is also more for children, but so it goes. They didn’t want to mail out a check, because they figured people would just stuff it into a savings account or pay off credit card debt. Instead, they decided to dole it out in small bits ($10 to $20 a week or so), with the idea that people would spend that extra few bucks buying gas, or stuff from the convenience store, or a few more groceries — that sort of thing. They wanted people to spend more money, so that the economy would recover. (It is necessary for money to move around. If money doesn’t move from one person to another, the economy stagnates. That’s how money is made, or generated: by moving it around.)
Just a brief word for those who might not know the difference between a tax credit (like the middle class tax cut) and a tax deduction. You can skip this paragraph otherwise. A tax credit is a reduction in the tax. In other words, on your tax forms next year, once your tax paid (or owed) is calculated, then $400 or $800 or whatever applies will be subtracted from the tax you owe (or paid). A tax deduction, on the other hand, is a deduction from your income, not from your tax. It will typically reduce the amount of your tax owed, but typically not nearly as much as a tax credit will.
Now, here’s the problem.
If you are a married couple filing jointly and both of you are working, then both of you are receiving the increase in your take-home pay. In other words, both of you are getting $800. If you are a single person working two jobs, then both companies are increasing your take-home pay by the amount of the tax credit.
That’s all fine and good except that at the time you file, by next April 15, you will have to come up with the money to pay back what you were overpaid. A married couple gets paid a total of $1,600 in tax cuts if both work, and a single person holding two jobs gets paid a total of $800 in tax cuts from her two employers. You were entitled to only half that.
This happens because the credit is per person. Let’s say you work at ABC Inc and your wife works at XYZ Inc. Whether the payroll is done in-house or out-sourced, the payroll company for ABC (or ABC’s in-house payroll department) has no idea whether the other company is reducing your deduction. And even if it did (but it doesn’t) it still would be required by law to reduce the deduction because the tax code demands it.
I haven’t really looked at how it comes out when kids are involved, but I suspect the damage is even worse. Especially if both parties are claiming 1 or more of the kids on their W4 forms. But that’s neither here nor there. The fact is that if you and your spouse both work, or if you work two jobs, you will receive double the tax credit to which you are entitled.
Therefore, it would behoove the frugal person who doesn’t want to pay a balloon payment of $400 to $800 or more at filing time, or who doesn’t want that much deducted from the refund they’re used to seeing, to put back the money or change their W4.
The latter is what my wife and I have decided to do. We are changing our W4s to withhold half the amount of the tax credit from each of our checks (on the line that specifies “additional withholdings”) so that we basically aren’t smacked with a bill for our taxes owed plus $800 at filing time.
I’m not sure what course the debate will take. Maybe I have misunderstood the tax law, except that it was brought to my attention by our tax accountant, who advised us to make the changes to our W4s as quickly as we can. So, I’d be surprised if the facts are open for debate.
However, I must say that I’m surprised that so few people are aware of this. (No one I have spoken to is the least bit aware.) And I’m surprised that the president, whom I admire, has never mentioned this problem when, frankly, boasting about his middle class tax cut.
And so I suppose the debate is this: Is the administration less transparent than it claims to be? Is the president or the Treasury Secretary deliberately leaving people to find out about this when they file? Shouldn’t they inform people that they will need to make certain adjustments to avoid the double whammy of couples who work and singles who work two jobs?
I’m not sure why the president has not addressed this issue, because a lot of people — I’m speculating here — will not be able to afford hundreds of dollars at filing time if the amount just hits them out of the blue, without having been forewarned. And none of this even addresses the possible penalties for underpayment of taxes. I don’t know what the threshold is, but at some point, if you withhold too much, you are dinged for an additional $25 or $50 or so.
Your opinions? Speculations? Scathing rebuttals?