Obama Tax Credit May Cause Millions to Owe More Taxes

Financial Planning magazine

By WebCPA

November 17, 2009

The Making Work Pay Credit, a tax credit that was a signature part of President Obama’s economic stimulus package in February, could lead to more than 15.4 million people owing additional taxes, according to a new government report.

… The credit is advanced to taxpayers by their employers through reduced withholding, resulting in an increase in take-home pay.

The Treasury Department’s Inspector General for Tax Administration said in a new report that the implementation of the tax credit creates the possibility that millions of taxpayers may be advanced more of the credit through reduced withholding than they are entitled to receive. When filing their tax returns for 2009 and 2010, such taxpayers may ultimately owe additional taxes.  Some also may be subject to estimated tax penalties.

The MWPC was implemented using new income tax withholding tables. However, the changes to the withholding tables did not take into consideration the dependents who receive wages; single taxpayers with more than one job; and joint filers where one or both spouses have more than one job or both spouses work. Other groups potentially affected include: individuals who file a return with an Individual Taxpayer Identification Number; those who receive pension payments; and Social Security recipients who receive wages. …

“While implementing a credit through reduced withholding is an effective way to provide economic stimulus evenly throughout the year, it is difficult to account for everyone’s circumstances,” said TIGTA Inspector General J. Russell George in a statement. “More than 10 percent of all taxpayers who file individual tax returns for 2009 could owe additional taxes because their withholdings were reduced by more than the Making Work Pay Credit. If corrective actions are not taken, this problem will continue to plague taxpayers in 2010.”

TIGTA recommended that the IRS increase media coverage, consider ways of advertising other than the media already being used, and target communications to taxpayers who may be adversely affected as a result of the MWPC. TIGTA also recommended that the IRS use the withholding tables that were in effect before the enactment of the Recovery Act for pension payments in order to prevent pensioners from being negatively affected by the MWPC.

The IRS agreed with TIGTA’s first recommendation and plans to take corrective action. However, the IRS did not agree with the second recommendation, claiming that it would be burdensome and costly.