Tax tip: New credit means changes in withholdings Published May 12, 2009 By Ann Fox 30th Space Wing tax office coordinator VANDENBERG AIR FORCE BASE, Calif. -- The government recently gave American taxpayers another economic stimulus in the form of the 'Making Work Pay Tax Credit.' However, unlike the 2008 stimulus, this one is not in the form of a check. Generally, for people who receive a paycheck, this credit was typically handled by their employers, like the Air Force, through automated withholding changes. Most workers started receiving this tax credit through small increases in their paychecks over the past month. The tax credit is supposed to provide up to $400 to individuals and $800 to married couples as part of the economic recovery package. However, the new tax withholding tables issued by the Internal Revenue Service could cause many taxpayers to get hundreds of dollars more than they are entitled to under the credit, which will ultimately have to be repaid at tax time or will simply result in a smaller-than-expected tax refund next year. Retirees who have federal income taxes withheld from their pension payments, and also have both married people receiving additional income through employment, could find themselves with an unexpected tax bill next tax season. A single worker entitled to the $400 credit may find himself owing the difference back at filing time if he works at a second job and has an additional $400 reduction of withholding. The same holds true for students with part-time jobs; they will enjoy the reduced withholding, but next year when their parents claim them as dependents, the students will find themselves with a surprise tax bill. Additionally, taxpayers who calculate their withholding so they get only small refunds could also face a tax bill next April. The $250 credit paid to veterans or Social Security recipients, if that person is not employed, may have to be paid back at tax filing time. (Remember the name of the credit: "Making Work Pay Tax Credit." Therefore, no employment, no credit!) Pensioners do not qualify for the "Making Work Pay Tax Credit" unless they receive earned income. However, the new withholding tables apply to all taxpayers, including pensioners, so an increase in their retirement may not be a good thing when filing tax returns next year. An employee with multiple jobs or married couples whose combined income places them in a higher tax bracket should consider submitting a revised W-4 to ensure that enough withholding is held to cover next year's tax for their combined income. You can also access the IRS withholding calculator at www.irs.gov/individuals/article/0,,id=96196,00.html to determine if you will have a problem in 2010. On another note, if there is California sourced income, you may want to revisit the state W-4 as other recent changes may affect you. California recently raised income taxes and reduced the amount of dependent exemptions from $309 to $99, so those who have children will have their exemption amounts decreased by $210 per child when they file 2009 California tax returns.