In February, 2009 the IRS issued updated withholding tax tables. These new tables incorporated the new “Making Work Pay” Tax Credit, which is effective for 2009 and 2010. The new withholding tables reduced the amount of income tax withholding from an employee’s wages to effectively give them the benefit of the credit during the year rather than at the year end when they file their returns. Although employees received the benefit of these changes without any action on their part, many employees will be placed in an under-withheld situation by the end of the year. Some employees could, in certain situations, owe an amount rather than receiving the refund that they were expecting.
For example, if you have a working spouse, he or she will also have had a reduction in withholdings. Depending on how you and your spouse completed your Forms W-4, you may have effectively double-dipped the benefits of reducing your withholdings.
Those who need to pay attention to their withholding include:
- Married couples with both spouses working one job (if they both completed their W-4s showing their status as “married,” they will both have $800 less withheld from their pay, but they will only get one $800 credit on their tax return. They will, consequently, have $800 less withheld than they intended for the year).
- Individuals with multiple jobs (each job will reduce their withholdings by either $400 or $800 depending on the status claimed on the W-4, but only one credit will be given on the tax return. They will, consequently, have less withheld than intended for each additional job worked).
- Dependents (if you can be claimed as a dependent on someone else’s tax return you are not eligible for the Making Work pay credit. However, the withholdings will be reduced by $400).
- Pensioners (pension recipients do not qualify for the Making Work Pay credit unless they receive earned income. Unfortunately, the pension withholding tables have also been reduced to effect for the credit. They will, consequently, have less withheld than intended by either $400 or $800 for the year).
We recommend that you discuss this situation with your employer or pension provider, as the case may be. It is too late in this year to make any meaningful corrections. However, if you feel that it is necessary, you should increase your withholdings accordingly between now and the end of the year via the 2009 Form W-4.
A simple fix for 2010 is to instruct your employer or pension provider (via the Form W-4) to increase your withholding by either $400 or $800 per year, depending on your situation.
Let us know if you need any help with this issue.