OK, the weeping and gnashing of teeth continues. Many taxpayers, especially those who use Turbo Tax and other tax prep software feel they are being taxed on the stimulus check that they received last summer. The confusion is understandable, but here’s the scoop on the stimulus, Turbo Tax, who you should be mad at, and why I care:
What was that stimulus check for anyway? It was NOT a pure handout. The check that you received last summer, was an ADVANCE against your refund for your 2008 taxes – i.e. the return that you have filed or will file in the next couple of months. So, let’s say that you ordinarily would have received $1,400 back this spring and you did receive a $1,200 stimulus check last summer. You will now receive only a $200 refund this spring because you have already gotten $1,200 of your refund. Note: This is all built right into the tax tables, so unless you use tax preparation software and pay close attention to your refund / payment amount as you progress through the return, you won’t even notice this calculation taking place.
How did they know what my refund would be? They didn’t, and that is what is creating some confusion right now. You may remember that you needed to have filed your 2007 Tax Return in order to receive a stimulus check. Who received a check and how much they received was based on information from the 2007 Tax Returns in anticipation that 2008 would be similar. So, now that 2008 is complete and we are dealing with actual data, taxpayers fall into one of three groups.
1. Those who received a stimulus check, but shouldn’t have because their 2008 income was too high. No problem for this group. While it’s true they shouldn’t have received a check, the IRS is not going to try to get that money back. This is not out of a suddenly-found goodness of their hearts. Again, it was only an advance to begin with, so it all comes out in the wash.
2. Those who didn’t receive a check and should have or received less than they should have received. The IRS still wants these folks to have their stimulus, and they will be eligible for a credit on their 2008 Return. It is for this reason that the stimulus is even mentioned on the 2008 Tax Return. They kind of have to do this as, once again, the assumption that each taxpayer received an appropriate stimulus payment is built into the tax tables.
3. Those who rightly received a stimulus check. This group will have nothing extra to do on their taxes, however their refund will probably be lower (or payment higher) than they would have ordinarily expected. In particular, those whose refund wasn’t going to be as much as their stimulus check might be in for a surprise when they have to make a payment.
When Turbo Tax asks me if I received a stimulus check and I click “Yes” my refund goes down, my payment goes up, or my refund turns into a payment. Why? This is the thing that is really confusing folks, and it all has to do with the mechanics of how most tax preparation software processes your return.
In the upper right hand corner there is a pervasive number that represents the amount of your return or payment based on the information that you have entered so far, and some default assumptions about the information that you have yet to enter. For a lot of people, once the W-2′s have been keyed in, this number is a pretty reasonable approximation of what their final result will be. The software assumes a standard deduction at the outset until the taxpayer has a chance to enter itemized deductions.
And this year, the software also assumes that the taxpayer did NOT receive a stimulus check and will therefore probably be entitled to some or all of the credit which could be up to $1,200 for a couple filing jointly. As soon as you click the button indicating that you did receive a stimulus check, that assumption goes away and the amount in the upper right hand corner is adjusted for the fact that you won’t be receiving the credit. To make things worse, this is one of the very last items on the return.
So, you’re going along in Turbo Tax, watching a relatively normal refund amount being tweaked as you progress through the forms and schedules. You are almost done when suddenly you click one button and experience up to a $1,200 unfavorable swing in your refund / payment. I can see where that would give one a start.
Who should I be mad at? Well, for my money, there are three main parties who did not handle this whole thing very well.
1. The IRS could have been much more clear about the nature of the stimulus checks that went out last summer. If taxpayers had understood all along that those payments were only an advance against this spring’s refunds there might be fewer surprises right now. Of course at the time the government wanted it all to seem like one huge act of benevolence on their part instead of them simply giving you your own money. Granted, even if it had been a handout it would have only been your own money, but that’s a discussion for another day.
2. Those who coded the software for this item. It is really kind of brutal the way it plays out. It would have been much better to either assume that the taxpayer DID receive a stimulus check (and therefore won’t be getting a large credit) until they can answer the question, or make that one of the first questions asked in the process of completing the return.
3. People who use their Income Tax like a savings account, except a savings account where someone else gets to keep the interest. Again, what happened last summer was the government doing for taxpayers what the taxpayers should be doing for themselves – returning the excess amounts that were withheld from their paychecks sooner rather than later. Fill out a new W-4 so that each time you get paid, the government gets only their share and little more.
Why do you care? Good question. I don’t use TT, and after doing my taxes had thought that this whole thing was pretty straightforward. The ruckus this matter has created on some fronts was a surprise.
Here’s the thing. I’ll rarely be the one having the government’s back, especially in these stimulus shenanigans. I believe our government is deserving of a huge helping of criticism and citizen uprising with the way they are going about things right now. However, before we criticize we must make sure to have our story straight.
Last Friday a caller into the Rush Limbaugh show relayed her tale of the big Turbo Tax stimulus surprise and she concluded that she was being taxed on the stimulus check. This sent both caller and Rush into a huge government-bashing session. There are plenty of reasons to find fault with our government right now. This isn’t one of them.