Making-Work-Pay Tax Credit to Cause Unexpected Tax Liability

USA Today reports that millions of American taxpayers might get an unexpected tax bill in 2010:

More than 15 million taxpayers could unexpectedly owe taxes when they file their federal returns next spring because the government was too generous with their new Making Work Pay tax credit.

Taxpayers are at risk if they have more than one job, are married and both spouses work, or receive Social Security benefits while also earning taxable wages, according to a report Monday by the Treasury Department’s inspector general for tax administration.

Here’s why there’s a problem:

Most workers started receiving the credit through small increases in their paychecks in April.

The tax credit was made available through new withholding tables issued by the Internal Revenue Service. The withholding tables, however do not take into account taxpayers with multiple jobs or married couples in which both people work. They also don’t take into account Social Security recipients with jobs that provided taxable income.

The Social Security Administration sent out $250 payments to more than 50 million retirees in the spring as part of the economic stimulus package. The payments were meant to provide a boost for people who didn’t’ qualify for the tax credit.

However, they went to many retirees who also received the credit. Those retirees will have the $250 payment deducted from their tax credit — but not until they file their tax returns next year, long after the money may have been spent.