"My employer will being withholding less income taxes beginning with my 3/16/09 paycheck because of the American Recovery and Reinvestment Act. A colleague is saying that although withholdings are changing, the tax tables are not and we will still have to pay at tax time. Is that true?"
I definitely understand the confusion. As if the tax code is not confusing enough as it is... Here is what my research uncovered:
- The particular part of the ARRA that is affecting your paychecks is called the Making Work Pay credit. This credit gives each working individual (and even non-working individuals) a $400 reprieve ($800 married filing jointly) from federal taxes.
- This went into effect 3/1/09, so look for it on your first pay check that includes days worked in March.
- Employers have the ability to give this credit to you throughout the year by adjusting your withholdings. This has (can have) the effect of raising your paycheck amount.
- You do not have to update your W-4 for this change to happen.
- If you do not have an employer (work for yourself, etc), you can claim the credit on your tax return.
- If your employer does adjust your withholdings, you must *still* report (not claim) the credit on your 2009 tax return.
- The tax tables have been adjusted for this.
I like this credit-through-the-year plan versus an end-of-year credit. It means you get to keep and use your money now, rather than lending it interest-free to the government to be returned next April. Just be sure to use that extra little bit to generate interest-- either through paying off debt, savings, or investing-- otherwise it doesn't matter if you lend money to the gov. interest free!
You can find plenty of information by Googling "Making Work Pay credit." For more info on who is eligible, what this could mean to you, and the adjusted tax table, visit this IRS link.
I found http://www.recovery.gov/ to be pretty much useless on this topic, but it does have a lot of general information about the ARRA.
I am definitely not a tax expert. If you find errors in this summary, please post a comment and let me know! That being said, I hope this clears things up for some of you who are wondering what is going on.