If you have federal taxes withheld from wages, pension payments, or IRA distributions, you probably noticed that your check increased earlier this year. As part of President Obama's stimulus plan, withholding tables were revised effective April 1, 2009 to incorporate the Making Work Pay tax credit and increase the amount of "take-home pay" workers receive in their paychecks. If you are single or married with one working spouse and not much in the way of other income (interest, dividends, or rental properties, for instance) and not a "higher income" taxpayer, this probably won't present a problem next April. You will qualify for the credit and the decrease in tax withholding will match your lower tax bill. Many other taxpayers will receive an unhappy surprise next April; their withholding will be lower but their taxes will not be. Not only will they have to have money to pay the tax, they will also be subject to penalty for underpayment of estimated taxes.
The IRS expects taxpayers to fund their annual tax liability throughout the year via withholding, quarterly estimated payments, or a combination of the two. To avoid paying an underpayment penalty, taxpayers must pay-in an amount equal to 100% of the prior year's tax or 90% of the current year's tax. "High income" taxpayers, those with an adjusted gross income greater than $150,000 ($75,000 if married filing separately), must pay-in an amount equal to 110% of the prior year's tax.
Among those who need to worry about the new withholding tables are:
- Couples who both work (both spouses have their withholding calculated as if they were each getting benefit of the credit, but the couple gets only one credit when the return is filed.)
- Taxpayers who have tax withheld and who also make estimated payments if those estimated payments were calculated based on a set dollar amount being withheld.
- Taxpayers whose income comes from pensions or IRA distributions (the credit is only for earned income but the tables are used by all payers.)
- Taxpayers who intend their withholding to be high enough to cover non-earned income (while the withholding tables account for the phase-out of the credit for higher income taxpayers, your other income could make you ineligible even though your salary does not.)
If you think you may have a problem, compare your anticipated withholding plus any estimated payments you will be making to your 2008 federal tax. If you are paid a fixed salary, using your most recent paystub, multiply your federal withholding amount by the number of pay periods remaining in the year and add that to the balance already withheld this year. If your checks vary, you will need to estimate the amount still to be withheld and you should plan to periodically compare your actual year-to-date withholding to amount with which you need to end up. If it appears you will be under-withheld, you should either prepare a new form W-4 or W-4P or arrange to make or increase your estimated payments. Or consult your tax advisor who would be happy to help you with the calculations. A few minutes looking at this now could save you from an unpleasant surprise next April.
