MONEY

This Year’s Most Confusing Tax Credit

The beauty of online tax prep software is that most people can get their taxes right without really understanding the nuances of the tax code. But sometimes I think that this has just given license to lawmakers to make the rules even more baffling.

I do my taxes online, but I’m also really careful to triple check the numbers and see if they make sense. That’s partly because of my job, which includes a fair amount of reporting on tax policy: I like to see how it all fits together. (And, of course, I really, really don’t want to get audited.)

Today I was finishing up my final check and was brought up short by the Making Work Pay tax credit and the new Schedule M you use for calculating it. Apparently, I am not alone. My tax prep software tells me that I have already received the credit in the form of reduced withholding throughout 2009. But then it has me claiming the credit on my tax form, which increased my refund. It sure looks like I’m getting the same credit twice.

I’m not. But it took me and two other MONEYstaffers the better part of a coffee break to puzzle out exactly what was going on. And even now that I get it, I find it hard to explain well. Here’s my best shot: As part of the stimulus package, the government gave each American a tax credit worth up to $400 in 2009. To get that money into your hands quickly, the IRS had employers automatically adjust your withholding so that you kept more of each paycheck. So line 2 on your W2 — the one that lists “Federal income tax withheld” — is about $400 less than it otherwise would be. But that also means that if you didn’t claim the credit, the IRS would expect the money back (or send you a lower refund.) “Your withholding was reduced, and that was putting money in your pocket,” says Mark Luscombe, tax analyst at CCH. “But that doesn’t say anything about what you owe Uncle Sam.” Claiming the credit, in effect, tells the IRS that you were indeed entitled to the lower withholding.

Got that?

No? I hate to say this, but just do what your tax prep software says. (After making sure you filled it all out correctly, of course.) And Congress: Maybe figure out a simpler way to do this next time. The tax code shouldn’t be a full-employment plan for H&R Block and Intuit.

Follow MONEY on Twitter at http://twitter.com/money.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser