The Smoke and Mirrors Tax "Cut"

Everyone recalls the tremendous applause given for President Obama and his tax cut, which was in the form of a rebate and reduced withholding that amounted to $13 a week ($400 to $800 for the tax year).

Well, don't go spending that money, because many taxpayers are going to need a chunk of that change come tax time. PT Barnum said that a sucker was born every minute. In this case, it's the millions of people who thought that President Obama was actually cutting their taxes.

Millions of Americans enjoying their small windfall from President Barack Obama's "Making Work Pay" tax credit are in for an unpleasant surprise next spring.

The government is going to want some of that money back.

The tax credit is supposed to provide up to $400 to individuals and $800 to married couples as part of the massive economic recovery package enacted in February. Most workers started receiving the credit through small increases in their paychecks in the past month.

But new tax withholding tables issued by the IRS could cause millions of taxpayers to get hundreds of dollars more than they are entitled to under the credit, money that will have to be repaid at tax time.

At-risk taxpayers include a broad swath of the public: married couples in which both spouses work; workers with more than one job; retirees who have federal income taxes withheld from their pension payments and Social Security recipients with jobs that provide taxable income.

Small is the operative word. You're getting a little bit more in your paycheck now, but the IRS will be looking for that money next year when it comes to tax time. Withholding is meant to provide the government with your tax obligation over the course of the year. The government makes money off that withholding in the form of interest. Taxpayers are supposed to calculate their tax obligations and determine whether they've overpaid or underpaid on their tax obligations including the withheld amount.

In other words, those people who are struggling to make ends meet and two-income jobs are going to see that their tax obligations are going to increase at tax time next year. They're getting more money now, but will have to pony it back up for the IRS when their 2009 income tax returns are due.

What the Administration and the IRS did was to adjust a few numbers so that people would not withhold as much money during the course of the year, but will have to pay more at tax time because their withholding doesn't cover their total obligation.

It was a phony tax cut because you're still going to be paying the same amount at the end of the tax year. All the Administration did was shift when the money was provided to taxpayers - either in the refund or via reduced withholding.

The actual tax rates remain unadjusted.

UPDATE:
Don Surber and Jammie have more.

UPDATE:
Oh, this gets so much better. It seems that the Administration knew that this would hit the very folks that President Obama said would help most, but no one wanted to get that story out since it would undercut the whole idea of providing tax relief.

This isn't relief. It's a huge headache for tax preparers come tax time next year. It's more needless complexity that will cost taxpayers more time and effort to complete their returns and still more money trying to figure out what is actually owed.