Taxes: Stimulus Payout Could Come Back to Haunt You

That little extra bit of money in the form of a larger paycheck tied to the Obama administration’s stimulus plan could end up taking a bite out of your federal income tax refund or even leave you owing taxes, some observers say.

The stimulus plan lowered federal income tax withholding rates, which results in more take-home pay but less money going toward taxes. The downside is some taxpayers may end up with not enough taxes being withheld to cover what they owe in 2009.

As a result, some taxpayers may need to increase their withholding amount by reducing the number of allowances claimed for the rest of year, which means making changes to a W-4 form available from an employer’s human resources department. Single taxpayers who are working at more than one job and married couples filing jointly in a situation where both spouses work are the most likely groups of taxpayers to be caught short.

Here is an example where a single taxpayer with two jobs could end up with a smaller refund or even owe taxes as a result of a provision of the Obama stimulus plan:

Assume a single taxpayer, who claims single filing and single withholding status with zero allowances for withholdings, earned $35,000 last year working two jobs. He earned $10,000 in one job and $25,000 in the other job. The total withholdings under the old withholding rates would be $3,700; the total under the new tables is $2,969. Because the total reduction in withholdings is $731 and the Making Work Pay Credit is $400, this leaves the taxpayer with a shortfall of $331.

People who are already working and take on a holiday job should consider being more aggressive when choosing a withholding amount for the holiday job.

Taxpayers who have concerns about whether withholding amounts may need adjusting can go to the IRS Web site, www.irs.gov , or use an online withholding calculator.