28 February 2009

the difference between a tax cut and tax credit

stolen from rush:

CALLER: I wanted to share quickly what I found out when I had my taxes prepared last week. The man that prepared my taxes for me cautioned me to watch out for my tax cut. He said, and you may want to adjust your withholding to take that back away, because the tax rate tables for next year when preparing taxes are not changing. So I could possibly owe my tax cut back to the government next year.

RUSH: You gotta be kidding. Not even I was aware of this trick. Say that again. They're not changing the rates, right?

CALLER: The tax rate tables that they use when you prepare your income tax.

RUSH: Yeah, these are not tax cuts.

CALLER: Right, exactly.

RUSH: These are transfer payments. These are tax credits and all that. There's no tax cut here. I should have been able to think of this on my own here, absolutely right. You're getting income, you're going to be taxed on it next year.

CALLER: Right. And we won't be able to pay it back $13 a week.

RUSH: 'Cause the same rates -- ah, man, your tax preparer is not only pretty smart but he's pretty forthright and honest with you on it. So what you are going to do?

CALLER: Change my withholding and take my tax cut away so I don't have to pay it back next year. Thank you, president, for nothing.

Obama is proposing to raise taxes on households earning over $250,000 by increasing the rate on the top two tax brackets and limiting deductions, starting in 2011. Republicans and other critics, knowing they will get little mileage from defending the rich, instead are casting the plan as a tax hit on people who run industrious little companies driving job growth. That's not likely, according to one in-depth analysis, which found that more than 95 percent of small business owners would be off the hook." The magical 95% number again, as in 95% of you are going to get a tax cut. Well, we just had a call, Gail in Lakeside, Arizona, and she just had her tax preparer do her 2008 income tax return, and her tax preparer warned her about the Obama tax cut that starts in April, where many of you ostensibly are going to see $13 more per week in your take-home pay. Withholding tables are being rewritten as we speak, so that when your employer gives you your first check in April you will see $13 a week additional in your net, and that reverts to $8 a week starting in January. Gail's tax preparer told her to be very careful because this really is not a tax cut because they are not adjusting the rates.

So the 13 additional dollars that many Americans will see in their paychecks is not the result of an income tax rate reduction. It's simply a tax credit. Even people who do not pay taxes will get this $13. She was told by her tax preparer if you take the $13 a month, that is additional income that you will be taxed on next year, in essence you'll have to give it back, because the rates are not being lowered and that will be called income. So there is no tax cut.

make sure you make your deduction change now so that you dont get hit next year paying the check. well you're going to get suck paying it no matter what. better to have it spread throughout the year, rather than pay it back in one lump sum. and yes, thank you president obama, for nothing!.


Mar said...

Except Gail and/or her tax preparer are wrong about this. It's not a tax cut, it's a tax credit and unless she has too much withheld (more than the amount of the tax credit), she can't owe it back next year.

the kerfuffler said...

yes, that was the whole point of the post. obama is calling it a "tax cut", whereas in truth it is a "tax credit". and something you might have to pay back, because it is considered "income". and yes, it depends on your deductions claimed.