The taxman cometh
I've done my own taxes for 22 years — a majority of them as part of a couple. There are lots of reasons I do them myself instead of using software or a tax preparer. Most of these reasons boil down to points of pride, but there are a few practical points there as well, cost being one of them. Why should I pay money to use a software package when part of my own tax dollars are spent to create, print, and mail the forms, not to mention employ the people manning the IRS hotline for my benefit? Why should I pay someone else to read and interpret the instructions on the forms for me when I'm perfectly capable of doing so myself? Why should I pay some random tax preparation office to transmit my tax form electronically when I can just as easily slap a stamp on it and drop it in the mail?
Ah, e-filing. The government has been pushing people to do this for several years now. I always said if the government really wanted me to file my taxes electronically, they would provide me the means to do so for free, regardless of income level, and not point me to a third party company. I guess they finally listened (or ignored those third party companies who lobbied the other direction). Last year, the IRS rolled out something called Free File Fillable Forms. Basically it's a Flash-driven interactive tax form library system. You create an account, pick out the forms you need, and start typing in the relevant info. When you're finished, you click a button and it gets filed. If you already know what forms you'll need and don't mind filling them in yourself (or had planned to do so on paper anyway), it's pretty straightforward to use. And it's free!
So I was finishing up this year's tax forms and got down to the "how much tax was withheld" section. Normally that's a fun moment because it's right before the refund calculation. As you've probably guessed, I'm one of those who would prefer a smaller refund, or even a small payment, because that means more money has been in our pockets over the year instead of being loaned out to the federal government for free. This year, I was rather shocked to find only $144 was withheld from my paycheck for the entire year — which meant we owed over a thousand dollars to the feds. Withholding is something I'm usually super attentive to, but it looked like my attention lapsed while something went drastically wrong in 2009. In fact, when I looked at some old pay stubs, I found the withholding had completely stopped at some point rather early in the year, so no federal taxes were coming out at all. What the hell?
A thousand dollar tax bill means penalties, quarterly filing, and a bunch of stuff I really don't want to mess with. I decided I might as well start assessing the damage. And while researching the penalty, I came across this gem:
The IRS will waive the penalty to the extent any underpayment is due to adjustments to the income tax withholding tables because of the making work pay credit.
— Form 1040A instructions
What's this... a credit? Adjustments to the withholding tables? Making work pay? By now I'm looking for the hidden camera and Allen Funt. It turns out things were proceeding as normal, though, and I'd apparently missed out on a pretty important tax notice from 2009.
The Making Work Pay provision of the tax code is part of the
American Recovery and Reinvestment Act of
2009. Essentially, the federal tax withholding tables were tweaked so less
tax was taken out throughout the year. The net result was everyone ended up
with a little more money in their pockets in 2009. And you get to take that as
a credit on your tax bill via a new form called Schedule M. It took me
awhile to figure out how that part worked exactly, as it sounded a lot like
double-dipping. It isn't. And thanks to
taxgirl
for shedding some light on this shady subject.
The amount you have withheld from your paycheck is not at all tied to how much
tax you owe. You can have any amount withheld you want, provided you can
justify doing so... but your best bet is to withhold the exact amount you owe at
the end of the year. In this case, the credit reduced the overall amount you
owed — and your withholding was reduced to give you that money earlier in
drips and drabs. That way, everyone was more likely to spend it and stimulate
the economy instead of stick it in the bank or pay off bills like in the
old
days when
you'd just get a check.
Not very intuitive at all, but hey. I will give George
W. Bush credit for keeping things simple. I can imagine him saying, "This tax
stuff is too complicated. Fuck it. Let's just send everybody a check."
Needless to say, I attached Schedule M, filled it out, and took the credit — and after I found another credit (the real estate tax credit), I got the tax bill well under $200. My goal is to reduce this even further and actually turn it positive, and I can do that with an IRA contribution (which we can actually afford this year). So, it looks like we're getting a refund after all. Quite a big change from how things looked earlier!
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On Goodbye, Blossom, Martha said: We can still dress up and go to Laury's. Or Aubrey's. Or even Soho's, if/when I get over being mad.