Obama's new witholding rate

[glock35ipsc]

& you bring up a good point. Paying back a tax credit through withholding is extremely inefficient. It's *easy*, but but too many people will be underpaid or overpaid. There are many cases where dual-income families will get back more than they are entitled - and will need to pay it back next April 15th. The reason is withholding/payroll software does not take into consideration if your spouse works and is receiving $800 too. Nor does it know if a second income pushes over the limit for even qualifying.

Since most people over-withhold anyway, probably means smaller refunds for many next year. Which I think will backfire a bit. So much for stimulating the economy if people don't get their beloved tax refunds.

The single people have less to worry about.

That's pretty much what my CPA said too. Her concern is that people that will likely make the same amount of money will have the same tax liability, but are now having LESS federal tax withheld. So many people that are just barely getting a refund will likely owe next year.

That being said, we are putting it aside until tax time rolls around next year, since we both work, we will likely owe half of what we got.

[mom-from-missouri]

OK. I just compared my DH last 3 paychecks (he gets paid weekly) with ones he received in December 08 & early January 09 and there is no change.
What am I missing?? Same amount of hours worked, same rate of pay, same deductions taken out, bottom dollar deposited to his checking and savings accounts are the same.
Is there something he needs to do on his end?
He is the only one getting a "regular" paycheck. I only get one when I sub and cash for the babysitting I do, and then I pay my own taxes...

[Snave]

I'm putting it in my ROTH. It's just enough to max out for this year. (I was just going to put in $4200 otherwise).

Probably the best thing to do with it. Otherwise you will get slaughtered with taxes in years to come to pay off the debt we are accumulating.

[FrugalIII]

The problem I have is I get paid by two sources. The first, my pension, the second my current employer. Separately, they are each under the $75k. Together they are over $100k. So, it seems to me that since my tax liability on each of them separately is less, but when I add them together at the end of the year, I will have to repay most of what the government gave me. All this means more taxes to me, I believe. Because of this situation, I already have an extra $300 a month taken out in federal taxes and I still have to pay between $1500 and $2k at the end of each year. Throughout the year I claim single/0. No matter how you look at it, I get screwed. Now it will be worse.

[Aleta]

FrudalIII: Just keep this to the side until the tax year rolls around and you will have the money to pay whatever you need to back. Meanwhile, it's in your account earning interest rather than in the coffers of the government.

[wnlbutterfly]

It wasn't suppose to take effect until April but some were pushing for March, so a JAN/Dec check isn't going to reflect it.

DH and I are in disagreement about whether the "extra" in your paycheck is going to amount to $400 or $800 per wage earner. The real funny here is that he works for the IRS, I work for a big tax prep office. I have sent in a request for clarification and will let you know. BTW, there is no "easy" answer out there on the internet....that is the one thing I have found with 90% of tax breaks/cuts/changes, they never give ALL the details until tax time and then we have to try and figure it out.

If you are working more than one job, if you and your spouse together jump into a higher tax bracket, keep a VERY close eye on how much you are extra you are getting back because the credit is only good for $800MFJ/$400single, and there is a phase out.

Not looking forward to next tax season, because I know there will be a LOT of people with big changes in their refunds and they won't be happy (and we get yelled at instead of those that caused it).

[Aleta]

So, if I understand what you are saying is that since it is from Jan - Dec , it might be that some if started in April might not even receive their $400. (single) or $800 (family). The new tax tables should reflect what your tax status is and it could be that some would even have a refund if the pay stays the same.

[wnlbutterfly]

I am saying that the change in the withholding rates just came out in April 09 (are is to be in effect). Paystubs from Jan/Feb were with the old withholding rates. Compare Feb with April.

Tax tables and withholding rates tables are different. There isn't any change in the taxes. Withholding rate tables tell employers what to withhold from your paycheck and send to IRS. The charts are broken down by how often you are paid (monthly, bi monthly and so on). And once you get to the right chart (bi-monthly for us). The employer looks at your W-4 which might say you are Married with 2 exemptions. They use that and how much your gross income is and it will give them the amount to withhold. I think many employers have computer programs that does this for them, but it is the same principal.

Let's say everything stays exactly the same for you next tax season, same filing status, ect. You now have gotten $400 more during the year in your paycheck. HOWEVER, there now is a Make Pay Work credit that is on the 1040 for $400. You get that credit, but you already got that money during the year so your refund (or amount due) stays the same as last year.

The problem that could happen, MFJ couple, both with two jobs...each job is giving back $400 during the year. That is $1,600, but the credit is only $800. So they will have gotten $800 MORE than the credit is, so they will either see a reduction in their refund OR they will owe more money to IRS.

In my own situation, I work part time, they don't withhold anything from my checks anyway, so I will not get that $400 during the year extra. Same with anyone that is self-employed. When I file MFJ, get the $800 credit and only $400 has been given to us during the year, so we will see a bigger refund.

I know this is confusing and I hope I didn't add to the confusion. I will be looking at the new withholding rates this weekend at the tax office.

BTW, there are also new changes with Earned Income Credit (give back more money to those that didn't owe taxes), more credit for education (which we will actually benefit from this year), and of course the famous first time home buyers credit/loan.

[tripods68]

The problem that could happen, MFJ couple, both with two jobs...each job is giving back $400 during the year. That is $1,600, but the credit is only $800. So they will have gotten $800 MORE than the credit is, so they will either see a reduction in their refund OR they will owe more money to IRS.

This is probably the case for us next year. In some way, its better to save it for now. But because we usually get Refund each year, it doesn't affect us too much.

[marvholly]

I just got around to comparing my March check w/ my first April check. I got a WHOPPING $4/week more. Oh. gee. Now I can go out and

do didly squat extra.

A month's worth will not even pay for a pedicure (help keep someone else employed) in my area or a decent (not super) meal out let alone what gas is going to go up to over the summer (as usual). I NEED new gutters. I should replace at least 1 TV. I have not bought ANY clothes or shoes in >2 years.

I KNOW!!! I can afford a fast food meal OR a Starbucks coffee weekly OR a movie ticket every 2.5 weeks.
Gag, Gag, Gag.
BFD

[wnlbutterfly]

I agree, the extra in the paycheck doesn't help really. I have been saying this for years. If they really want to boost the economy, change the withholding tables the other way, withhold MORE taxes, and then at tax time when they get a BIGGER refund, people will go out and spend it on bigger ticket items.

The problem is those that make the decisions don't live like the rest of us. And I know financial experts would say to get more in your paycheck, invest it, then you will have more money than you would at tax time. BUT most people don't invest it, most people don't even notice an extra $20 a paycheck. At least not the people I do taxes for around here.

I have to give credit on one aspect though. When Bush did the rebate check, we (taxpayers) spent a lot of money on processing the checks, mailing the checks, mailing the letters saying you are going to get a check, tying up IRS resources to figure out the rebate. A lot of wasted money that could have been given back to the tax payers. This was a cheaper way to "give" the credit. It just wasn't enough, you figure how much money they wasted in other areas on pork spending, and all they could squeeze out for the tax payers was $400 and $800? WOW!

[noppenbd]

I agree, the extra in the paycheck doesn't help really. I have been saying this for years. If they really want to boost the economy, change the withholding tables the other way, withhold MORE taxes, and then at tax time when they get a BIGGER refund, people will go out and spend it on bigger ticket items... BUT most people don't invest it, most people don't even notice an extra $20 a paycheck. At least not the people I do taxes for around here.

I think that's kind of the point. The government wants you to fritter away this extra $20. With such a small increase in your paycheck, most people will not bother to save the additional amount. Most people spend until they run out of money, so they will just spend this money rather than sticking it under the mattress as they might do with a large chunk. That extra spending will be a direct boost to the economy.

[kork13]

I think that's kind of the point. The government wants you to fritter away this extra $20. With such a small increase in your paycheck, most people will not bother to save the additional amount. Most people spend until they run out of money, so they will just spend this money rather than sticking it under the mattress as they might do with a large chunk. That extra spending will be a direct boost to the economy.

It kills me that this is the way the government thinks.... Our leaders based this billion-some dollar 'stimulus' off of the assumption that we (the citizenry) generally live irresponsibly. Way to go. Do a comprehensive survey, and sure, you'll find many who do just that. However, I think the (silent) majority would be people who are mostly responsible, and do not simply spend because there is money to spend. Sure, there aren't tons of the dedicated savers like you'll find here, but most people still only spend what they need to, and save the remainder. It's a way of thinking, a matter of trust in those you represent, and as a leader, making broad policies to cover for the lowest common denominator is never a good way to go. It breeds contempt and complacency. Is that really what our leaders should aim towards for our country? I should hope not.....

(sorry for the minor rant on politics)

[noppenbd]

It kills me that this is the way the government thinks.... Our leaders based this billion-some dollar 'stimulus' off of the assumption that we (the citizenry) generally live irresponsibly. Way to go. Do a comprehensive survey, and sure, you'll find many who do just that. However, I think the (silent) majority would be people who are mostly responsible, and do not simply spend because there is money to spend. Sure, there aren't tons of the dedicated savers like you'll find here, but most people still only spend what they need to, and save the remainder. It's a way of thinking, a matter of trust in those you represent, and as a leader, making broad policies to cover for the lowest common denominator is never a good way to go. It breeds contempt and complacency. Is that really what our leaders should aim towards for our country? I should hope not.....

(sorry for the minor rant on politics)

I hear you, but as a practical matter, if they are going to spend the money to stimulate the economy, I would prefer they do it in a way that works. The fact is, when they sent out the big checks in 2008 the majority of people used it to pay down debt or plunk it into savings (I think the figure is around 30% saved it and 40% paid down existing debt with it). So really only 30% of that stimulus stimulated anything. I would bet that the $20 a week is much more likely to be spent than $400 in one big check.

[kork13]

I would bet that the $20 a week is much more likely to be spent than $400 in one big check.

I do mostly agree with you, but I expect that the impact will be less than hoped/planned for, and far less immediate. I see more people saving that extra money for a number of months to buy something more significant (new shoes, electronics, whatever, or if at all) rather than suddenly going out to buy one extra latte each week.

What I'm trying to say is that most people do know what they can and can't afford, and especially in the current environment, most people aren't just going to rush out to blow extra cash as soon as they get it in their hot little hands.