Expert Available: Federal Tax Credit Confusion Causes Many to Owe Unexpected Taxes, MU Expert Says

March 29th, 2010

The views and opinions expressed in this “for expert comment” release are based on research and/or opinions of the researcher(s) and/or faculty member(s) and do not reflect the University’s official stance.

COLUMBIA, Mo. ­— During the past year, the U.S. government has enacted multiple tax credits in an effort to stimulate the lagging economy. With tax season in full swing, a University of Missouri tax expert says many people are growing confused by the ever-changing tax policies and some are left owing unexpected money to the IRS when they file their tax returns. Brenda Procter, an MU Extension specialist in the College of Human Environmental Sciences and tax policy expert, says some people who received the “Make Work Pay” federal income tax credit in the past year will owe money back to the IRS.

“Many people may be surprised to learn they must pay more taxes then they initially expected,” Procter said. “While they aren’t being overtaxed, there is confusion as to why they owe the extra money.”

The “Making Work Pay” credit was enacted by Congress in 2009 to help stimulate the economy. Unlike the economic stimulus payments made in 2008, the “Making Work Pay” credit did not come in the form of a check. It was paid out throughout 2009 when employers reduced federal income tax withholdings up to $400 for working individuals and $800 for working married couples, depending on total income levels. Procter says the confusion begins with those who work more than one job.

“For workers with multiple jobs, this payout method may have created challenges,” Procter said. “Without changes to employee W-4 forms, all employers would have reduced withholding during the year, each adding back enough to paychecks to pay out a worker’s total annual ‘Making Work Pay’ credits. If several employers were reducing withholding simultaneously, taxpayers may not have had enough total withholding to cover their 2009 tax bills.”

While Procter says this poses a problem for some taxpayers, she also says increases in other family tax credits will cover the difference for many families who otherwise would have seen their refunds decrease. Procter advises anyone who works multiple jobs and was surprised they ended up owing more taxes or disappointed in the size of their refunds to consider revising their W-4s to be sure enough is being withheld to cover the 2010 tax bill.

“This tax credit was not only in effect for 2009, but will be in effect for 2010 as well,” Procter said. “While it may be too late to adjust withholdings for 2009, people should make sure to check for this year as well. This is true in general, whether ‘Making Work Pay’ caused the problem or not. If a taxpayer owes more in taxes at the end of the year than they can comfortably pay, they should change their W-4 forms to increase withholding for the next year.”

Brenda Procter has been a state Extension specialist with a focus on poverty, and has served as an MU personal financial planning faculty member for 17 years. Procter has worked extensively with low-income families and maintains the Poverty At Issue Web site, a resource for agencies and educators working with people in poverty. She volunteers as an income tax preparer and educator through the Volunteer Income Tax Assistance or VITA program.