The 2009 Economic Stimulus Package

This week I am going to tell you about a much discussed but little understood provision of the new stimulus package that has been devised by the Obama Administration. Yes, you could say that it is political, and I try to stay away from politics. However, this one is just too critical to let it slide.

In order to explain this, I have to revert to the stimulus package that took place last year. Under that plan, most lower- and middle-income people were sent stimulus checks of up to $600 for single taxpayers and $1,200 for married filers.

The stimulus checks were supposed to be cashed and spent on goods and services that would spur the economy. There were several reasons that it didn’t work out the way it was intended, but the main one was that nobody seemed to have enough confidence in the economy to want to spend a “gift” from Uncle Sam. Many people used the stimulus check to help pay off existing bills and credit card balances. Others, like me merely deposited the check and left it to gather interest.

A current misconception that I continue to hear about the stimulus checks of 2008 is that they have to be added to income on the IRS Form 1040 for taxation. That just is not true.

For proof of the prior statement, get yourself a copy of the 2008 Form 1040 Instructions—you can just go to a library and look at the booklet there if you don’t want to keep it. By the way, don’t use the 1040EZ or 1040A Instruction Booklet, as the information will appear in a different place in those booklets.

The only place on the Form 1040 that you could possible report the stimulus check income is on Line 21, “Other Income.” Therefore, I will direct your attention to that page that covers that entry, page 28. In the first column, paragraph three reads:
Do not report any nontaxable amounts on line 21. Nontaxable amounts include:
· Child Support
· Economic stimulus payments (emphasis mine)
· Life insurance proceeds received because of someone’s death...
It cannot be any clearer than that. 2008 Economic stimulus payments are nontaxable, and don’t let anyone tell you any different.

Now we come to the 2009 Economic stimulus payments. Under the new administration, a change was called for, and a new and different kind of stimulus payment was conceived, one that should stand a chance of being spent as intended to stoke the fires of the sinking economy.

Instead of sending a one-time payment that could be used for any number of purposes, the 2009 stimulus payments will be apportioned out as subtractions from payroll taxes. That means that, provided you qualify by being under a very high level of income, each and every paycheck you get from your employer starting in April will have a little higher net take-home pay in it.

The amount that was agreed upon is $13 per week and most people will be qualified to receive that amount from April through the end of the year. It will not even be referenced on your pay stub, and most people will not really notice that they are getting more net pay. That is the beauty of the new stimulus package; we will probably spend it without even knowing it. Pretty neat!

One other neat item in the package is that those who are really low income earners and don’t normally owe income taxes will have their $13 per week subtracted from their Social Security deductions, so they will still get that extra income, and it will be tax-free.

Now, how about the other earners, those who do owe taxes at the end of the year and therefore have their stimulus payments subtracted from their W-4 tax deductions on each paycheck? In order for them to get the stimulus payments tax-free, their marginal tax rate would have to be lowered to reflect the amount they receive in stimulus payments. In other words, their tax liability would have to be adjusted.

If you are currently paying 25 percent on the last dollar of income—your marginal tax rate—you would have to have that adjusted to something less, maybe 24.5 percent, to account for the extra $507 that was given as a stimulus payment throughout the year. However, that percentage of reduction in taxes would not lower all liability by the same amount.

I will try to illustrate the above assumption for you shortly, but first let me ask you, have you heard anything about a lower tax rate for the lower-and middle-income earners? Well, we keep hearing that Obama is going to lower taxes for 95 percent of taxpayers, but nothing material has been done.

Any tax cut that does not reflect less than one percent reduction certainly has nothing to do with the 2009 stimulus payments. Even if a tax cut is passed for lower income taxpayers, it will not have any effect on the stimulus shortfall.

Okay, let’s look at an example of what I am trying to disclose. To make it as simple as possible, I will use some rounded-off numbers. I don’t have access to the withholding tables currently being set up and printed for your employer’s payroll department, but I can extrapolate the numbers and come pretty close.

John Workman is married and has two dependent kids—four personal exemptions against his taxes. He earns $52,000 per year and is paid bi-weekly. To keep it simple, assume that his IRA, 401(k) and other subtractions from income equal his additions from interest, investments and other non-employment income. Therefore, his total taxable income, $52,000 less $11,400 for standard deductions and $14,600 for personal exemptions, equals $26,000.

John’s gross pay every two weeks is $2,000. Withholding of income taxes by his employer is $120 per pay. Social Security and Medicare taxes are $153. State and local income taxes amount to another $100, so John’s net pay will be $1627.

In April of 2009, John’s first paycheck is $1653, and it continues at that amount for the rest of the year. John will possibly notice the increased amount on the first paycheck, but he will likely not question the increase beyond that date, and will probably spend the difference during the year.

When it comes time to file taxes for 2009 in April of 2010, John will learn that he is in arrears by about $500. That is the amount he will owe the IRS to pay his taxes. I guarantee that John will not be very happy about that, and he will want to know why he owes so much.

The plan to give the new stimulus incrementally is brilliant, because the tendency to save it or use it to pay off existing debt will be less likely. Instead, it will probably be spent on new goods and services. However, unlike the 2008 stimulus checks, which were tax-free, the 2009 stimulus pay will be a short-term loan that must be repaid in full at tax time.

What we have here is a stimulus payment that is (in my opinion) devious and fully taxable. It is not just extra income that must be taxed at the marginal rate, possibly 10-to-28 percent, but a tax liability at 100 percent of the amount received.

This is just one example of the “change” we voted for in November. I “hope” we are learning from it.

I encourage you to disagree with me about the facts in this column. However, I do not want you to write directly to me at my email address, even if you know it. No, I prefer that you respond directly to the blog in the “Comments” section below the text. You might need to create a user name and password for yourself. Hint: Make your user name something anonymous, and you can post without revealing your true identity. Then type your remarks into the Comments area and open a discussion that we can all participate in.

(Don’t forget to set your clocks ahead one hour tonight to wake up to Daylight Savings Time, unless you live in one of those states that got smart many years ago and quit participating in the foolishness. Lucky you if you do.)