New Federal Withholding rates

[Janitor Bob]

I understand that part of the recently enacted stimulus plan was a decrease in the federal withholding rates....and people will see this in a small increase in their net pay each pay period.

If federal withholding rates are lowereed and tax rates are not changed....won't this result in my clients seeing lower refunds/higher amounts due next year at this time?

If so, I want to advise some of them to fill out new W-4s to increase their Federal withholding.

[mcb39]

I am already "advising" some of mine. The people who have jobs and are working are generally doing all right. It is the ones who have lost their jobs who need the stimulus. Of course, there is an increase and extension in Unemployment Benefits, but then you see the ones who don't have enough working quarters to collect; and the circle continues to spin.

[taxtrio]

In theory, the reduced federal withholding should be offset by the 400.00 refundable credit to be shown on the 2009 return. (work for pay credit?). The problem is that people may get more than they are entitled to, and then the 400.00 credit (or lack of one) will leave them in the hole!

For example: If a married couple (both working) has "married" on their W-4"s. The new federal w/h tables will give them each double per week. Not 10.00 per pay, but 20.00 per pay. (The tables are once again assuming that if you are married that your spouse doesn't work..... Single tax table takes out only 10.00 per pay. Definitely need to re-work the W-4's.

Also some may not qualify at the end of the year because of income limits... One spouse makes over 75,000 and the other makes under 75,000. for example. When you combine their income for the year they may be over the limit.

And the kids that don't think their parents are going to claim them.... well they will probably owe ... and it goes on and on.

They made this sooooo simple!

Taxtrio

[JohnH]

It will help some people, but for others it will be nothing more than smoke & mirrors followed by a bill at the end of the show.

[GraceNY]

I don't think they will change the tax table/rates. I think they will have a line in the payments section of the 2009 tax return to take the credit ($400/$800).

Here's a couple of situations that I foresee as problematic thus far:

(1) W-2 wage earner and collects Social Security. Gets the lower withholdings from 4-1 through 12-31-09, but ALSO gets the $250 lump sum payment from Social Security. My understanding is that individual only gets $400 maximum. How will they repay the $250?

(2) W-2 wage earner has two jobs. Day job pays $50,000 and Night job pays $28,000. Both jobs will be using lower withholding tables. When it's time to settle up on 2009 return, you've got a taxpayer who earned $78,000. That's $3,000 over income threshold of $75,000 the $400 is based on. And, this could be worse if the total income from both jobs results in a $0 credit.

I am discussing this with my tax clients when I deliver the return. I'm especially conscious about the client's who generally have a balance due or only a small refund. In some cases, I am recommending that they file a new W-4 and request an additional $ amount be withheld.

Many are lamenting that there's no one time lump sum check like the last go around.

It will definetely be an interesting 2009 filing season. I am so NOT looking forward to it. Just be glad we won't have to ask them how much extra they got in their paychecks in order to determine how much, if any, the credit will be. They couldn't even remember how much they got in the one-time lump sum stimulus checks in 2008!

Grace

[David1980]

I don't think they will change the tax table/rates.

They already did, a week or two ago.

http://www.irs.gov/newsroom/article/0,,id=204447,00.html

[Janitor Bob]

They already did, a week or two ago.

http://www.irs.gov/newsroom/article/0,,id=204447,00.html

What was changed was the Federal withholding tables.....I do not think they are changing tax rates.

Example...Let's say a taxpayer in 15% bracket has $9.00 less fed tax withheld from their pay each week because of the recently revised withholding rates. He/She has $9.00 more to spend on pizza and beer each week...adding up to approx. $396 for the year.

When taxpayer does their taxes this time next year, they will still be in the same 15% tax bracket...and will still owe the same amount in taxes....but now, they will have paid in $390 less.....reducing their expected refund or increasing their balance due.

This may not be a huge issue for taxpayers that get large refunds...but for those who had no refund or very small amount due...this will be an unpleasant surprise next year....unless they submit a new W-4 to increase Fed withholding back to amount it was prior to the withholding rate reduction.

Am I looking at this right or am I missing something?

[mcb39]

What was changed was the Federal withholding tables.....I do not think they are changing tax rates.

Example...Let's say a taxpayer in 15% bracket has $9.00 less fed tax withheld from their pay each week because of the recently revised withholding rates. He/She has $9.00 more to spend on pizza and beer each week...adding up to approx. $396 for the year.

When taxpayer does their taxes this time next year, they will still be in the same 15% tax bracket...and will still owe the same amount in taxes....but now, they will have paid in $390 less.....reducing their expected refund or increasing their balance due.

This may not be a huge issue for taxpayers that get large refunds...but for those who had no refund or very small amount due...this will be an unpleasant surprise next year....unless they submit a new W-4 to increase Fed withholding back to amount it was prior to the withholding rate reduction.

Am I looking at this right or am I missing something?

My payroll program already sent the updated withholding tables weeks ago. So far, I have not installed. For several of my clients this will be a mistake. Just dealt with a young couple last night who would have owed this year if they were not getting the first tim home buyers credit. Have asked them both to go in and change their W4s now as they are both having way too little withheld and next year will be worse. Why do they always give us the feeling that it is our fault when they owe.? :dunno:

[MontanaEA]

JB,

Here's how I believe it's supposed to work. Your taxpayer had $390 less in federal tax withheld. When he does his 2009 federal return, he will qualify for the $400 Make Work Pay Credit, which was made permanent as part of the Stimulus package. Therefore, since he already received $390 of it through payroll withholding, his net additional refund will only by $10. The idea was to get the money into his hands sooner rather than later.

[Ray in Ohio]

JB,

Here's how I believe it's supposed to work. Your taxpayer had $390 less in federal tax withheld. When he does his 2009 federal return, he will qualify for the $400 Make Work Pay Credit, which was made permanent as part of the Stimulus package. Therefore, since he already received $390 of it through payroll withholding, his net additional refund will only by $10. The idea was to get the money into his hands sooner rather than later.

In other words, the tax rates have not been changed and TP will have the same taxable income with the same tax as this year. But he will get a $400.00 credit off his taxes. Therefore the $396.00 less withholding will not lower his refund. He will actually get a $4.00 bigger refund in this scenario.

[LindaB]

What was changed was the Federal withholding tables.....I do not think they are changing tax rates.

Example...Let's say a taxpayer in 15% bracket has $9.00 less fed tax withheld from their pay each week because of the recently revised withholding rates. He/She has $9.00 more to spend on pizza and beer each week...adding up to approx. $396 for the year.

When taxpayer does their taxes this time next year, they will still be in the same 15% tax bracket...and will still owe the same amount in taxes....but now, they will have paid in $390 less.....reducing their expected refund or increasing their balance due.

This may not be a huge issue for taxpayers that get large refunds...but for those who had no refund or very small amount due...this will be an unpleasant surprise next year....unless they submit a new W-4 to increase Fed withholding back to amount it was prior to the withholding rate reduction.

Am I looking at this right or am I missing something?

I think the $396 from your example here does not represent income tax, but the refundable credit, so the amount of income tax withheld will not have changed. From the little I've seen so far, it looks like the employer will have to tell the employee (on the W2 ?) how much of the credit they were paid during the year, because the taxpayer will have to include on the 2009 tax return how much of this credit they received during the year. I haven't seen anything that addresses what will happen if a taxpayer, or taxpayer and spouse, receive more than $400/$800 during the year.

What I've seen so far is pretty vague, but I can't help thinking it's going to be a mess for those doing payroll.

http://www.irs.gov/newsroom/article/0,,id=204447,00.html

[MontanaEA]

LindaB,

No, it shouldn't matter how much of the credit he already received. The operative thing is that he owes $X in income tax, less the $400 credit, and he has paid in $Y in withhold tax, therefore, the refund is $Z. Let's not make it more complicated than it needs to be.

[Ray in Ohio]

I think the $396 from your example here does not represent income tax, but the refundable credit, so the amount of income tax withheld will not have changed. From the little I've seen so far, it looks like the employer will have to tell the employee (on the W2 ?) how much of the credit they were paid during the year, because the taxpayer will have to include on the 2009 tax return how much of this credit they received during the year. I haven't seen anything that addresses what will happen if a taxpayer, or taxpayer and spouse, receive more than $400/$800 during the year.

Linda,

I tend to disagree, respectfully of course.

I think the employer will actually withhold less from the employees paycheck. To the tune of $400 per person. This person then gets a $400 credit on his 2009 tax return and therefore his/her refund should not be affected.

I do not believe there will have to be any separate reporting from the employer to the employee. It is all in the Fed withholding.

(willing to be corrected if I am wrong. Thats how I see it)

[Janitor Bob]

In other words, the tax rates have not been changed and TP will have the same taxable income with the same tax as this year. But he will get a $400.00 credit off his taxes. Therefore the $396.00 less withholding will not lower his refund. He will actually get a $4.00 bigger refund in this scenario.

In this scenerio, there would have to be a seperate line for a $400.00 credit on the 1040/1040A/EZ in 2010....Is this what we expect?

I was under the impression that the "Make Work Pay" credit of up to $400.00 actually was implemented in the form of payroll withholding rate reductions...ONLY (not a line on next years 1040).

...I'm confused

[Ray in Ohio]

In this scenerio, there would have to be a seperate line for a $400.00 credit on the 1040/1040A/EZ in 2010....Is this what we expect?

I was under the impression that the "Make Work Pay" credit of up to $400.00 actually was implemented in the form of payroll withholding rate reductions...ONLY (not a line on next years 1040).

...I'm confused

JB,

That is exactly how I understand it. Tax rates etc will not be changed but you will have a separate $400 credit in 1040/A/EZ to reflect the credit. I agree with Montana... lets not make it more complicated than it really is.

[Janitor Bob]

JB,

That is exactly how I understand it. Tax rates etc will not be changed but you will have a separate $400 credit in 1040/A/EZ to reflect the credit. I agree with Montana... lets not make it more complicated than it really is.

Ahhhh...So the reduction in Fed withholding rates (recently implemented) and the $400.00 "Make Work Pay" Credit are two seperate items?

...So al long as your decrease in withholdings is not more than the $400 credit, you should not be hurt

[Ray in Ohio]

Ahhhh...So the reduction in Fed withholding rates (recently implemented) and the $400.00 "Make Work Pay" Credit are two seperate items?

...So al long as your decrease in withholdings is not more than the $400 credit, you should not be hurt

My thinking is that the "reduction in Fed withholding rates" is a reflection of the "make work pay" credit.

(clear as mud... I know)

[LindaB]

I do not believe there will have to be any separate reporting from the employer to the employee. It is all in the Fed withholding.

I was just going by this from the IRS:

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

It seems to me that if the employee is going to report on his tax return how much of the credit he received, the employer will have to tell him.

[Ray in Ohio]

I was just going by this from the IRS:

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

It seems to me that if the employee is going to report on his tax return how much of the credit he received, the employer will have to tell him.

how is the employee going to receive the credit from the employer?

[Bart]

I was just going by this from the IRS:

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

It seems to me that if the employee is going to report on his tax return how much of the credit he received, the employer will have to tell him.

I read that to mean the employee will report the amount of the credit due on their 2010 1040 not the amount of the credit already received.