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Surprise! There's no news on tax credits

Headlines across the country are blasting that millions of taxpayers may owe come tax time because "the government was too generous with their new Making Work Pay tax credit," as the New York Daily News put it.

It sure makes for dramatic news coverage... only it's not quite right.

The government didn't make a mistake when calculating the Making Work Pay tax credit and this most definitely isn't something just hitting the radar of taxpayers. It just makes good headlines now.

The issue of too much withholding has been making news since the inception of the credit in early 2009. Yahoo even appeared to revamp an earlier version of the CNNMoney.com story released on this past Tuesday, titled "Stimulus surprise: 15 million people may owe taxes" from a piece released six months ago. Clicking on the link from the prior story, formerly here, now gives you a 404 error. Hmm.

The story is not new. It wasn't even new when both MSNBC and Yahoo "broke" the story in May 2009. And sure, I was critical of their timing then.

Here's the real scoop: The tax tables are not wrong and there's no mistake. The real issue is that your individual circumstances cannot always be accounted for in a table. Some taxpayers will get the right amount and a few might get too much.

How many taxpayers might fall into that "get too much" category? Last year, the IRS reported that more than 155 million taxpayers filed returns. It's now estimated that approximately 15 million taxpayers -- or just under 10% -- may have received more credit than they bargained for in 2009.

But I'm guessing that 15 million is a bit high -- and here's why. Tax professionals and taxpayers have been aware of the potential for receiving too much credit since President Obama enacted the Making Work Pay Credit by signing the American Recovery and Reinvestment Act of 2009 into law in February 2009. As a result, many of those taxpayers who are at risk of receiving too much credit have already taken steps to remedy the problem including making adjustments on form W-4.

Who may be at risk? Tops on the list are college students and others who may be claimed as a dependent on someone else's return. This is because if you are claimed as a dependent on someone else's return, you do not qualify for the Making Work Pay Credit. If you have received the credit and were not eligible, you will have to return it, either in the form of a payment to IRS or a reduced refund if you normally qualify for a refund.

Also at risk are married taxpayers who both work or taxpayers who work more than one job. In both cases, there is the potential that the combined incomes may reach a phase out limit.

Additionally, if one spouse earns considerably more than the other, or if a taxpayer works more than one job, there is the potential that the withholding from one job could run up the bracket, resulting in too much credit withheld. Again, excess credit will have to be repaid either in the form of a check to the IRS or a reduced refund.

How much are we talking? For most taxpayers, if there is an overpayment, it should be relatively small. The credit didn't boast big numbers even at the top. The maximum allowable credit under the tables is $400 per individual and $800 per married couple. Phase outs apply for individual taxpayers with adjusted gross income in excess of $75,000 (up to $95,000) or $150,000 for married couples filing jointly (up to $195,000).

Wage earners working one job or households with one wage earner should receive the correct credit amount. Similarly, high wage earners should not be affected.

Those who are unemployed should not be concerned about the prospect of receiving too much credit. Since the credit is paid out of wages, if you don't work, you will not receive the credit. On the plus side, not receiving the credit means no chance of "overwithholding."

Retirees and the disabled are not affected by the credit since they should have received a paper check rather than a credit.

Again, this is not new information. These rules, as written, have been in place since the early part of the year. Realistically, advance credits and payments are always fraught with the potential for disaster. They're a particular thorn in the side for tax preparers who may have to explain the consequences to taxpayers after the fact. But politicians love them. As a result, this is not the first to come down the pike and it certainly won't be the last (though I imagine it would be if tax pros ran the world).

Bottom line: there's no "gotcha" here for taxpayers. There's no mistake. The reality is that it's a one-size fits all tax credit for a society that comes in all sizes. A majority of taxpayers won't even feel a thing.

So move along folks, despite the hype, there's nothing to see here.

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