Be careful with the tax refund

[Kay1]

My husband and I planned to spend our $600 toward this years AP's but after reading this article, I'm not so sure. It seems it's actually just next year's refund sent early and we may end up having to send it back. I'm very confused as are many. I will not spend a penny until all is clarified. Here is a good article you may want to read.

http://www.rockymountainnews.com/drmn/business/article/0,1299,DRMN_4_754516,00.html

[elgerber]

Not to argue with the tax experts in that article, but I took this directly from the IRS website, and I took it mean that you will not have to pay it back...

<<Individuals who did not have an income tax liability for 2000 but who have one for 2001 will be able to claim the tax credit on their 2001 return, provided they are otherwise eligible. Taxpayers whose advance payment is less than the credit amount figured on their 2001 tax return will be able to claim the rest of the credit when they file their 2001 return. Taxpayers whose advance payment is larger than the credit amount figured on the 2001 tax return will not have to pay back any difference.>>

Does anyone else read it that way or am I crazy?

Erika

[ripleysmom]

elgerber, I thought the same thing as you but the check really IS an advance refund of taxes paid in YTD.

I am NOT happy with this and resent the smoke and mirrors used to make everyone think that they were getting EXTRA money back.

[Kevin&Becky]

Not to argue with the article but I am an accountant and this is how I interprut this "rebate/advance refund". The check is indeed an advance refund on your 2001 income. The current tax brackets are going to be modified as of July 1 2001 and rather then change the first bracket to 10% for 2001 they gave us an "advance" for that amount (based on 2000 earnings). They could have waited until year-end and given out the new tax tables with the new 10% rate and we would have gotten a "bigger refund".

The bottom line is if you are in a similar tax situation in 2000 and 2001 you will see very little difference in your year-end refund. You do not have to pay back this "advance" or claim it as income or anything like that. I am not real sure what the article was trying to say but the bottom line is your year-end situations are similar then your taxes owed/refunded will be similar.....

Good Luck in understanding this mess.

Kevin

[6_Time_Momma]

It is indeed an advance on next year's refund. BUT I also read that you would Not have to pay it back if your refund would have been less than $600. I did not get one, so I don't have to worry. I do beleive it was not portrayed acurately by everyone, though.

[ducklite]

Seeing as how my return was over $6000 last year, I do'nt at all mind getting a bit of it back early :-)

We have extra taken out after owing over $2000 two years in a row :-(

Anne

[ripleysmom]

Kevin, I think there are going to be lot of unhappy people come next April, that's what I think.

[Kay1]

My concern is that my husband has a new job with higher pay and I earn all my money from investments so I don't know what our taxes will be next year. And what about people who made adjustments in withholding? Maybe others aren't quite as confused as I was. I think I was thrown by the fact that some call it a rebate. I did think it was an extra refund from this year's taxes.

[LKS]

I am also an accountant (though I only do my own taxes - thank goodness) and I believe Kevin&Becky is right. Without this "early" money, most of us would have received a larger than usual refund (or lower than usual payment due) next April. Now we will just receive the usual. Expect a lot of unhappy people who owe money - but then, isn't everyone who has to send a check unhappy? I've worked in payroll long enough to know that remembering you got extra money "long ago" doesn't make most people feel any better about it. Hope they have a plan for handling their bad PR in the spring. Anyway, I say use the money now however you want, but make sure you are not underwithheld if you don't want a surprise next spring.

On a related note, can you imagine how much money the government is spending to send out letters about the refund check, then the refund check to everyone? Maybe they are trying to support the USPS now that everyone is emailing.

[frost5000]

My spin on the whole thing is that staggering the refunds throughout late summer/fall will keep the GOP favorably in the minds of November voters. April is far enough away from the vote that it doesn't matter as much if we're happy or upset. But then again I don't get a check so that may be affecting my spin??:smooth: I say enjoy it while you have it!!

[Dennis the WDW Menace]

Don't panic, I think everyone is blowing smoke. If you read the article they are trying to make you all think it is a conspiracy in order to sensationalize their news story. You do get the rebate and you don't have to pay it back and it is to pay for your tax that is being reduced in this year, 2001. I think it is great and am using it to pay for a trip to WDW because of the lower airfare on SW air and I am going to have fun. For those who want to make you feel bad with stories like this, I will enjoy the trip for them also! In the past year and a half I have been through some life threatening situations and while I am not going to throw caution to the wind I realize now that you can either enjoy life or you can take seriously those people who want to beat their chests and say that the sky is falling.

[mickey4ver]

The way I see it, is it seems we are getting a gift from the government of our "own" money in the form of this rebate check. But the government has it all figured out that they will get it all back in next years tax return.

Makes me wonder

[elgerber]

I'm not sure what happened to my original post, but it was supposed to say what I had read on the IRS website which was, Taxpayers whose advanced payment is larger than the credit amount figured on the 2001 tax return will not have to pay back any difference. I knew this was an advance on this years taxes, but I was sure I had read you did not have to pay it back if it's more than your refund amount.

Erika

[Kay1]

I don't get the impression that's the case, Erika, though that would be great. In my case, we do our taxes with Quicken and never know until the last second what we owe or will get back. My husband does computer tutoring on the side and we never know in advance what that income will be or what we'll spend on medical bills, etc. Unless the IRS has Miss Cleo on their staff, I don't think they know either. Personally, I'm grateful someone wrote this article because I won't be viewing this as ' found " money anymore. I'd hate to see someone get a big shock next April when they owe what they don't have.

[Heidi]

OK. Let me see if I am getting this correct. Lets say last year I did not owe in or get anything back. If I make the exact amount this year I will probably owe in $600???

Sorry, I realy am horrible at understanding this kind of stuff.

[elgerber]

Just in case anyone is interested, I thought I'd post the address for the IRS page with the information I read in it...

http://www.irs.gov/ind_info/apinfo/index.html

Erika

[dvc_john]

There is no smoke and mirrors!

The tax rates that will be used to figure your 2001 taxes have been reduced.
The withholding rates were adjusted on July 1 to reflect the changes in the upper brackets (ie 28% to 27%, etc.).
The withholding rates were NOT changed to reflect the change from 15% to 10%. They will be adjusted next January 1st.
The refund/rebate is a return of the overwithholding of the lowest bracket (15%-10%).

In short, if your income is basically the same for 2001 as it was for 2000, and you have not changed your withholding exemptions, and your deductions are comparable for both years, your refund (or taxes owed) next year at tax time will be comparable to this year. Period!

[Kevin&Becky]

Well said DvcJohn.......:smooth:

[GrumpyOne]

As John said, if you didn't have a significant financial change then you shouldn't see much of a difference.

Fact: The advanced refund is based on the taxes you paid in 2000. Let's say that your family made 60,000 in 2000 but the wage earner(s) retired Jan 1, 2001 and decide to live off the checking account for a year until Social Security kicks in. You just received this check for $600 as an advance refund for earning in 2001... but you don't have any. Will you need to repay it? No. Even if you have a small amount of income and have a small tax bill, you still won't need to repay.

Congress and Pres. Bush (it was actually Joe Leiberman who got the advanced refund in {ref S 628 & S Amm 225}) decided that since they were cutting taxes, to give everyone their refund on that tax cut early. If you haven't made any changes then getting this refund shouldn't affect how much your refund or payment is on April 15th, 2002. Of course, dozens of other items were also messed with, like the 1% reduction that went into effect on July 1st for the 28% bracket and higher, so nothing is guaranteed.

If you don't feel comfortable spending it now, stick it in a three or six month CD and figure out your taxes next year.

[Caskbill]

I don't quite see what all the confusion is about. Think of it this way. Suppose in June 2001 you bought a new car for $20,000 and paid 7% sales tax ($1400.00). Then, your State decides 7% is too much, and changes it to 6%, EFFECTIVE 1-1-2001. So you've overpaid by 1 %, and get a refund check for that amount ($200.00). If you bought another car in 2002 for $20,000, you would only be charged the new 6% sales tax rate, or $1200.00. So, beginning in 2002, you actually pay the correct rate, not the old rate.

Basically this is the same with your witholding taxes. The tax tables for 2001 are going to overwithold you because they're witholding at a higher rate (in our example 7%), but should be witholding at a lower rate (say 6%). So instead of keeping YOUR money for a year, they are giving it back to you now, before you even file your taxes.

As far as seeing it in your paycheck as of July 1st, that only affects the part of your taxes in the higher bracket (say 28% going to 27%). The part of your wages being taxed at the lower bracket (15% going to 10%) are not being moved for witholding purposes until 1-1-2002. So, beginning in January you'll see a reduction in your witholdings.

The tax reduction is REAL. The $600 represents money that you WOULD have paid in taxes for 2001, but now you're not. For 2002 and beyond, you'll actually see your witholdings going down.

If there was no change in your income or deductions from say 2000 to 2001, and this year you paid $200 at filing time (for fy 2000 return), then on Apr 15th of next year you'd expect to pay $200 again for fy 2001). In each case you underwitheld by $200 per year. If there were no tax reduction, you simply would be paying that $200 again, as always, and not think anything of it. That's exactly what it was the previous year.

Now, consider that all that is the same, except you've also got a $600 check in your pocket. THAT my friend, is a tax reduction.

[DadofChristaSonofRay]

Due to the change in the tax laws (if all other things stayed the same, i.e your
deductions, exemptions, income) you would be getting a $600 bigger refund
next year. Instead the goverment has advanced us $600 this year and you will
get the same size refund next year.

[Kay1]

I think I'll take your advice, Grumpy One since I don't know what our income will be. The only thing I'm still not clear on is how the percentage of, say, $60,000 can be the same as, say, $70,000, or how $300 " fits all." But since I'm just putting it in savings, it doesn't matter. Thanks.

[cindala]

I printed the Rocky Mtn. article and will let my DH, the accountant, decide. We always use our refund for Disney, so I'm not spending this tax relief check just yet. (Unless of course it's for a room ressie or airfare!:D )


Thanks for the info!



:bounce: :bounce: :bounce: :bounce: :bounce: :bounce: :bounce: :bounce: :bounce:

[catwho]

I don't know about all states, but in Alabama, you have to pay state income tax on your tax return! So this $600-ish that everyone is getting back, may actually be less. :p

We are spending our money anyway (actually it is part of our 2002 Disney fund) We will worry about the taxes later. Shouldn't be that much on $600. If you are usually near the cutoff on your state taxes, you may want to investigate if you will owe anything on this amount or not. Not sure how it works considering it is a "rebate/refund/advance"

Scrooge McDuck for 2004!
:earsgirl:

[Caskbill]

Kay1, the one-size fits all is really pretty straight forward. We have a progressive tax system which simply says the more you make, the more you pay. But unlike a flat tax (for example a sales tax), where you pay a fixed percentage, income tax rates actually adjust (go up) as you make more money.

I don't know the actual figures, so let's just use some numbers off the top of our heads for an example. For convenience, we'll make them simple. Suppose you make $60,000 a year.

First you count your deductions, family, mortgages, other taxes paid, etc. This gives you a base amount that you pay NO taxes at all on. Let's say that's $15,000, so this part of your income is tax free. That leaves $45,000 taxable income.

The $45,000 is not taxed at a single rate. It begins at the lower rate (Use 15%). But only part of it is taxed at this rate (Let's say $12,000 of it). So your taxes so far are 15% of $12,000, which equals $1,800.

The remainder of your income jumps into the next bracket, say 28%. So you have the remaining $33,000 times 28% for $9240.00. Your total tax then is $11,040.00 ($1800 + $9240).


Now comes the tax cut. The change in the lower rate goes from 15% to 10%, which is retroactive, but will not change on your witholdings statement until Jan 2002. So your taxes for this year on that middle $12,000 goes from $1,800 (15%) to $1,200 (10%), or $600 less. That's a $600 tax reduction. However instead of making you wait until Apr 15th next year, you get the $600 check now. (Since it's a reduction of year 2001 taxes, you get the reduction in 2001, not having to wait until 2002)

Your remaining income $33,000 was taxed at 28%, but changes to 27%, an annual difference of $330 ($33,000 times 1%). Another way is that instead of paying $9240 (28% of $33,000) you only pay $8910 (27% of $33,000), or a difference of $330. That change is effective on your paycheck beginning July 1 of this year. I guess that would be about $6.34/week.

Now, for the one size fits all. The person making $70,000 still has the same $15,000 tax exemption, and the same middle income of $12,000, so the same $600. However, their income at the 28% level is $43,000 ($70,000 - $15,000 - $12,000) (compared to the other person's $33,000). So they get the 1% reduction in that, or $430, or about $8.27/week.

A person making $40,000 still has the same initial exemption and middle figure income so gets the same $600. However, their income in the 28% bracket is only $13,000, so they get that changed from 28% to 27%, ($3640 to $3510) or about $130 which is $2.50/week.

A person making $27,000 a year, is never into the 28% bracket. So they get the exemption of $15,000 and the entire remaining $12,000 is all in the lower tax bracket, so they also get the $600 reduction, but have no change in their weekly paycheck (Because none of their money was being taxed at 28%)

In summary, the impact would be:

$27,000/year, old taxes = $1800, new taxes = $1200, Total reduction = $600 ( = 2.22% of total income)

$40,000/year, old taxes = $5440, new taxes = $4710, Total reduction = $730 ( = 1.83% of total income)

$60,000/year, old taxes = $11,040, new taxes = $10,110, Total reduction = $930 ( = 1.55% of total income)

$70,000/year, old taxes = $13,840, new taxes = $12,810, Total reduction = $1,030 (= 1.47% of total income)

In summary a person making $27000 receives 58% as much money (actual dollars) as a person making $70,000 ($600/$1030), even though their income was only 39% as much. ($27,000 / $70,000).

Or, they go from paying an actual 6.66% of income ($1800) to 4.44% of income ($1200), a difference of 2.22% .

The person making $70,000 goes from paying an actual 19.77% of income ($13,840) to 18.3% of income ($12,810), a difference of only 1.47%

A person making $27,000 receives a higher tax cut as a percent of income than a person making $70,000. Actually it's about 150% as much. (2.22 / 1.47). So the $27,000 income person gets 1 and 1/2 times as much tax relief as the $70,000 person.

Neverthelessl, many, in my opinion uninformed people, still try to call this a tax cut for the rich.

It would be like someone who just bought a car for $10,000 and got a $500 rebate check, complaining because someone else who just bought another car for $20,000 got a $600 rebate.

Please note all figures are for illustrative purposes only. As everyone know, while the tax brackets are very straight forward, the tax deductions and credits make a HUGE difference in actual taxes paid. For example, a family earning $70,000 per year, with several children, day care, a mortgage on a $250,000 house, a mortgage on a vacation home etc, could easily wind up paying less in tax than say a retired couple making $50,000, but whose children are gone, whose house is paid for, and can't afford a vacation home at all. But let's leave all that for the debate board. That's another matter entirely.

This tax cut changes the tax RATES. Everything else remains the same. (For now.....lol)

[Kay1]

Thanks, Caskbill. You took a lot of time with that and I appreciate it and ,Catwho, you are right. I know there are nine states considering raising taxes because of the tax cut but the amount shouldn't be too high.