New tax breaks create headaches for filers
Retirees' returns are rejected, and some workers face surprise tax bills because of problems with stimulus measures.
This news article is by Ashlea Ebeling and Janet Novack from partner Forbes:
The big stimulus bill that Congress passed last year included a tax break called the "Making Work Pay" credit. As it turns out, a more accurate name would have been simply the "Making Work" credit.
Recently retired seniors and some who work part-time are having their electronically filed returns claiming this credit rejected by the Internal Revenue Service's computers in large numbers.
Why? The credit -- usually paid through lower tax-withholding rates of $400 per worker (or $800 per couple) -- is supposed to be reduced by the also-new $250 per person (or $500 per couple) "Economic Recovery Payment" sent to Social Security recipients and veterans on disability. Supposedly, the senior filers didn't accurately state whether they got the $250 payment when filling out the new Schedule M for the Making Work Pay credit.
Robert Meighan, a CPA and vice president of Turbo Tax, Intuit's tax preparation software unit, reports that aside from mistakes seen every year, the $250 discrepancy is the most common reason customers' 2009 returns are being bounced back by IRS computers.
The two tax breaks were among a dozen new individual tax benefits Congress approved as part of the $787 billion stimulus bill last year. But now the massive package is creating tax time headaches --and tax-saving opportunities -- for millions of families.
Some older taxpayers simply don't realize they got the $250 because it was directly deposited into the same bank accounts their Social Security is put in. The payment isn't taxable and, absurdly, wasn't listed on the annual benefits statement Social Security recipients are sent for tax purposes.
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But William Stevenson, a Merrick, N.Y., tax accountant, insists the IRS database is flawed. "They say people were eligible for the payments who may not have received it and then their returns get bounced,'' he complains. Those taxpayers may have to re-file their returns reporting the $250 per person they don't believe they got, then request a letter from the Social Security Administration attesting they didn't get the payments, and then file amended returns, he says. A lot of work for a smallish check.
(Note that civil service and public employee retirees who don't receive Social Security are also due the $250 per person payments, but they didn't get advance checks and will have to fill out Schedule M to receive the money.)
Yet another big problem: Many taxpayers, including two-income couples, multiple job holders and college students, are facing unexpected tax bills because -- thanks to Congress and the IRS --their withholding was reduced too much. The Treasury Inspector General for Tax Administration estimates more than 15 million taxpayers could owe more. The IRS insists that number is way too big, but preparers say they're already beginning to see shell-shocked victims who were expecting refunds and now will have to write checks to Uncle Sam.
Some of the affected taxpayers aren't eligible for the Making Work Pay credit because they can be claimed as dependents on their parents' returns or because they earn too much -- the credit phases out for single filers with adjusted gross income of between $75,000 and $95,000 and couples filing joint returns with AGI of $150,000 to $190,000. Others are eligible, but had the credit advanced (meaning withholding reduced) by multiple employers. That's common if a taxpayer holds more than one job or if both spouses work and list their status as married filing jointly.
"Some people will be very surprised and very unhappy," says Mary Mellem, an enrolled agent in Green Bay, Wis., who is breaking the bad news to clients who didn't heed her warnings last year to revisit their withholdings.
Aside from the problem with needing to come up with extra cash by April 15, taxpayers could be liable for underpayment penalties. Fortunately, the IRS is providing relief, although you have to know to claim it, notes Claudia Hill, a Cupertino, Calif., tax pro, who edits CCH's Journal of Tax Practice and Procedure. (According to the instructions for IRS Form 2210, Underpayment of Estimated Tax, you can request a penalty wavier if: "The underpayment was caused by adjustments made to income tax withholding tables that took effect in spring 2009.")
Meanwhile, be aware that the Making Work Pay credit also will be in effect for 2010. So if too little was withheld in 2009, be sure you adjust your withholding for 2010 on the W-4s filed with your employers, since there's no reason to believe the IRS will waive penalties again. (IRS Publication 919 has all the details on how to adjust your withholding for 2010.)
Yet another 2009 return hassle, albeit a potentially lucrative one: Taxpayers who want to claim the $8,000 refundable credit for first time homebuyers will have to file their returns on paper. That's because there were many fraudulent, mistaken or premature claims for this credit on 2008 returns. The IRS is now requiring taxpayers to submit documents showing they've closed on the house, along with Form 5405. (If you're a long-time homeowner and bought after Nov. 6, you may qualify for a new, smaller $6,500 credit. For more details, click here.)
Adding to the problems is misinformation spread by some real estate agents over who qualifies for the credits. "It's mass confusion and there's a tremendous amount of abuse,'' sighs Douglas Stives, a long-time tax practitioner and now a professor of accounting at Monmouth University in New Jersey.
Note that the credit for eligible 2010 home purchases -- sales under contract before May 1, 2010, and closed before July 1, 2010 qualify -- can be claimed against 2009 taxes. If you don't close on your house by April 15, you can get a filing extension or file your 2009 on time and later claim the credit on an amended 2009 return.
Another confusing but valuable benefit: college credits. If you earned too much -- or too little --to claim the Hope College Credit for your kids last year, take a look at the new $2,500 American Opportunity Credit for 2009 and 2010. The credit doesn't start phasing out until a couple's income hits $160,000 ($80,000 for a single parent). Plus, a parent who has no net income tax liability (due to low income and other credits) can get up to $1,000 of the credit as a check from Uncle Sam. For all the details, click here, or take a look at IRS Publication 970, Tax Benefits for Education -- 2009's edition is a quick read at only 99 pages.
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