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MinnEcon Blog
Paul Tosto

Tax shock, delivered

Go Deeper.

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MinnEcon is all about sharing our experiences in this economy, so I thought I'd share one about something I highlighted a few weeks ago that's now biting me.

In February, I posted: For some, stimulus delivers a tax shock. I detailed the experience of Ken Vail, a Blooming Prairie man who after years of receiving modest tax refunds or paying small amounts was floored to discover he owed $1,700 after finishing his 2009 federal taxes.

Frustrated, Vail tracked back the problem to 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 ($400 per person, $800 for those filing jointly). But millions of taxpayers unknowingly got more money up front than they were entitled.

Maybe you see where this is headed.

Yes, Ms. MinnEcon, who does our family taxes, told me last night that we will owe several hundred dollars on our 2009 taxes. Tracking back the problem, she was surprised to find how little her employer withheld in 2009. It had to be an error.

Nope. It was the stimulus bill.

The Treasury Department figures more than 15 million people are in a similar boat.

Why? The changes to the withholding tables didn't take into account situations like single taxpayers with more than one job or married couples where both spouses work (hello).

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.

Here's the fix: Go to your employer and get more withheld. This will be an issue for 2010 taxes.

Ms. MinnEcon and I typically take more withholding than required and get a refund at tax time. I'm not sure if we did anything to stimulate the economy with the cash advance we didn't realize we had. But now that we'll be paying, we're in hunker-down mode.

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Are you doing your 2009 taxes and dealing with issues tied to the Making Work Pay credit? Or did you have this figured out way in advance?

Post below or contact me directly and share your story.