A Question that Arose on the Radio Show This Morning
It’s got to do with the tax cuts that were a big part of the Stimulus package Obama got through Congress early last year.
The idea arose that all that was changed was that a smaller portion of people’s paychecks was taken out in WITHHOLDING, but that the tax bill for people was UNCHANGED when April 15 came around.
In other words, it was argued that the only change was that people had more money in their pockets for a matter of months, but then they had to pay correspondingly more later when they paid their taxes.
That this was the case was argued pretty persuasively by several callers whose own experience should have put them in a good position to know, such as a “tax preparer” and a person involved in doing payroll for a semi-large outfit. Both said that the withholding rules changed, but that the tax rates were unchanged.
I don’t know what to make of that. On the one hand, besides the testimony of people who should know, I can readily imagine that there was SOME of that. But on the other hand, it seems implausible to me that this was ALL that the tax cut part of the American Recovery Act was about– for a couple of reasons.
For one thing, the Obamites were putting together a stimulus package that was supposed to unfold with a stimulative effect over a two-year period. It just makes no sense to devote 1/3 of such a “stimulus” to something that in a matter of months would become an anti-stimulus (taking MORE money from consumers at tax time).
That’s no stimulus, and they weren’t just seeking a few months of boost for the economy to be followed by a choking off measure of the same size.
Secondly, if it were just a matter of withholding less but not taxing less, then the 1/3 of the presumed “stimulus” that was dubbed a “tax cut” would not have been a net COST to the federal treasury, and one would hardly think that politicians would call something a cost when it was revenue neutral.
So I am perplexed. On the one hand, I credit the testimony from the tax-preparer and the payroll person who called into the show. On the other hand, I imagine there must have been more to the much-mentioned “tax-cut” than this simple postponement, for mere months, of the feds taking the same amount of money from the taxpayers.
Does anyone know what the actual truth is about that part of the stimulus that was called a tax cut?
July 22nd, 2010 at 2:46 pm
In order to obtain the $400 (single) or $800 (married jointly), it was necessary to file Schedule M, which was included in the IRS booklet that everyone received. The so-called “making work pay” credit phases out for high earners (namely, exceeding $75,000 for individual or $150,000 jointly).
According to this NYT article, the IRS adjusted taxpayers’ final tax bill even if the taxpayer failed to submit Schedule M:
http://www.nytimes.com/2010/04/10/your-money/taxes/10tax.html
This was true in my case. Just to verify that the IRS gave me the credit, I phoned them and they brought up my account and verified the fact that our refund was indeed greater by the amount of the “making work pay” credit. It would seem prudent for people to either double check (as I did), or simply compare their actual final tax bill (whether they ended up paying additional or getting a refund) with the tax liability that they thought they owed when they filed.
So, I am guessing that the individuals calling your show either (a) earned too much to qualify, or (b) got the credit and didn’t know it.
July 22nd, 2010 at 3:05 pm
The tax cut was actually a rebate of $400 per individual and $800 for a couple. But instead of sending out a check for the rebate, it mostly took the form of a reduction in withholding each week for the year with final adjustments possible when taxes were filed at the end of the year.
July 22nd, 2010 at 4:16 pm
Let me see if I’ve got this straight, Jim and Ken.
Are you saying that there WAS a cut, that it didn’t involve changes in the Tax Tables, that it was targeted at people below a certain income threshold? And are you saying that to get the rediction in taxes, people had to file some extra form? That’s what it sounds like you’re saying, Jim, and I’m less clear, Ken, about what you’re saying about “final adjustments” being possible when taxes were filed at the end of the year.
How easy was it for people to know what to do and to do it?
And whatever the deal was, wouldn’t you think that a competent “tax preparer” would be fully aware of these $400/$800 rebates? And wouldn’t someone running a payroll know the people (except those over how much?) were paying less taxes, net, and not just delayed taxes?
July 22nd, 2010 at 8:01 pm
Here are some points in response. Ken is exactly correct – payroll departments were given new instructions to follow for pay period withholding so that the cash would be in workers’ pockets all through the year. I simply did not address the aspect of paycheck withholding; I was focussed upon the texpayer’s final tax bill. [Not all employees occupy positions wherein there is a regular monthly fixed level of compensation (their hours and thus pay, are intermittent or irregular), so in those minority of cases, all or most of the credit came at tax time, not throughout the year)] Regardless, a reconciliation was necessary at tax time, as Ken said.
The income limits were what I stated above; the $800 and the $400 were phased out for earners beyond the $75,000 and the $150,000. However, these limits actually capture the vast majority of workers and households (in 2009 median US household income was $52,029), so only a fairly small percentage of higher earners were excluded or received a lower amount.
As Ken said, the $400 or $800 showed up as a credit (I guess that could be called a rebate) on line 63 of one’s form 1040 after working through Schedule M.
And, no, the tax tables on pp. 77-88 of the 1040 instructions were not revamped to reflect the credits; rather, the credits were done through Sched. M and Form 1040 line 63.
July 22nd, 2010 at 8:06 pm
According to the NYT article cited above, about 6% of tax filers missed the form (as of the date of the article), but the IRS went ahead and did the credit for them anyway, in an attempt to be sure no one failed to get it.
July 22nd, 2010 at 8:14 pm
Here’s a passage from the NYTimes article to which Jim Z. provided a link:
July 24th, 2010 at 3:28 pm
My taxes were lower this year. State was higher though to make up for it…..