For some, stimulus delivers a tax shock

After years of receiving modest tax refunds or paying small amounts, Ken Vail was floored recently when he finished his 2009 federal taxes and found he owed some $1,700.

Tracking back the problem, he found a surprising culprit -- last year's federal stimulus.

The bill tweaked the tax tables so employers withheld less and people got more take home pay up front. It was basically a cash advance to help stimulate the economy to be settled up at tax time with the "Making Work Pay" credit.

But millions of taxpayers unknowingly got more money up front than they were entitled to receive and, like Vail, are about to discover the Making Work Pay credit doesn't cover the cash advance. (The credit's worth up to $400 for single filers and $800 for those filing jointly.)

Here's why. According to a U.S Treasury audit, the changes to the withholding tables didn't take into consideration situations like single taxpayers with more than one job or married couples where both spouses work.

So if you got the maximum "cash advance" from each job, you likely got more than you were supposed to and you may owe money.

Are you affected? Here's an easy-to-read page, put together by a Pennsylvania congressman, with many of the likely scenarios.

The easy way to fix all this would have been to go to your employer and request more withholding. But how many of us knew to do that?

The Treasury audit in November estimated, "15.4 million taxpayers could unexpectedly owe taxes for Tax Year 2009 as a result of the Making Work Pay Credit."

Vail, a Blooming Prairie man who's part of MPR's Public Insight Network, told us his employer took about two-thirds less in withholding. It didn't raise any red flags until he did his taxes.

"I feel like I've been duped," he wrote in a letter to his congressional representatives. "At this point I do not know how I'm going to be able to pay this."

He told us:

The MWP credit is reduced (to $300 for us) if you received stimulus credit last year which both my wife and I did because she was on Social Security disability and I am a disabled veteran.

The other complicating factor was the Social Security payments my wife received last year. In previous years that was her only income and the benefit was not taxed but she started back to work and that bumped our income which in turn required us to pay taxes on half the disability income. That represented $685 of our tax bill.

IF we could take the entire $800 MWP credit and subtract the $685 taxes on the SS income we still would owe nearly $500. Had the normal amount of taxes been taken out throughout the year we would have owed very little. I still feel that the withholding reduction was a bad idea and should have been optional.

I've been talking to some of my other co-workers and finding that I'm not alone. One employee only had $45 taken out last year (she did claim more exemptions); a retiree who works part-time and receives social security (as does her husband) owes $5000; one person's tax preparer said they have seen many more owing money this year.

Normally, about 75 to 80 percent of taxpayers receive a refund each year and the average refund is more than $2000, said Carrie Resch, spokeswoman for the IRS in Minnesota and the Dakotas.

"We are getting some questions here and there on the (Making Work Pay) topic, but not a huge volume by any means," she said after checking with the local walk-in IRS help center in Minneapolis.

"The vast majority of workers had enough taxes taken out of the paychecks during 2009 and can still expect a refund. But every situation is different, of course, so if taxpayers in some circumstances (those where both spouses work, people with more than one job, dependents, etc.) didn't adjust their withholding last year, they may find themselves owing tax instead."

There is some relief for individuals who owe and are assessed a penalty, she noted. The penalty can be waived if it is related to the MWP credit.

Vail figures that relief would be worth only about $40 in his case. At any rate, he says, "I've now adjusted my withholding so that we won't get caught like this again."

We'd love to hear from Minnesotans about the Making Work Pay credit and its effect on your 2009 taxes. This will also be an issue for 2010 taxes.

Post below or contact me directly.

BONUS INFO: Resch says the Minneapolis Internal Revenue Service will open its offices at 250 Marquette Ave. on Saturday, Feb. 20. fom 9 a.m. until 2 p.m.

Staff will be there to help answer tax questions. Those with incomes of $49,000 or less can get free tax preparation and electronic filing help.

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