What You Need to Know About the Stimulus

Four key provisions of the massive stimulus package will put money directly into Americans' pockets: the Making Work Pay tax credit, a supercharged first-home buyers credit, a $25-a-week increase in unemployment benefits and a valuable subsidy for workers who lost their health insurance when they lost their jobs.

But the key question is WHEN you'll start seeing the money? Although many details are still up in the air, we can fill in the blanks.

Making Work Pay tax credit

This is the heart of the put-money-in-peoples'-pocket plan. The credit is worth $400 for a single taxpayer or $800 for a married couple who files a joint return (whether one or both of the spouses work). Yes, that's less than last year's rebates, which were worth $600 for singles, $1,200 for married couples, plus $300 for each dependent child younger than 17.

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And, unlike last year's stimulus -- which was delivered via direct deposit to bank accounts or checks in the mail -- this year's "grease" for the economy will come in dribs and drabs through slightly higher paychecks for the rest of the year. The IRS produced revised tax withholding tables in record time, and employers are now scrambling to get new numbers built into their payroll systems. Once that is accomplished, workers will automatically enjoy higher take-home pay. You don’t have to do anything to get your money.

Some lucky workers will see extra cash in their paychecks in March; almost everyone should enjoy higher take-home pay by April. We say "almost" everyone because both the credit and the reduced withholding to reflect it phase out at higher-income levels. The credit disappears as 2009 adjusted gross income (that’s basically taxable income before subtracting exemptions for yourself and your dependents and before subtracting your standard or itemized deductions) rises between $75,000 and $95,000 on a single return or between $150,000 and $190,000 on a joint return.

When you file your tax return next spring, you'll claim a credit worth 6.2% of pay up to a maximum of $400 for singles or $800 for married workers. The idea is that reduced withholding now will jibe with reduced tax liability then, thanks to the credit.

How much you’ll get

Although married workers get a credit twice the size of singles, they won't enjoy twice the increase in take-home pay. Here's why: The government decided to cram the full $400 credit amount for singles into reduced withholding during the last nine months of the year -- about $45 a month. But it skimped on reduced withholding for married workers. Rather than deliver the full $800 credit value during the rest of this year, tax withholding will be cut by just $600 -- or about $65 a month. You'll get the the other $200 when you file your return next year.

Now, if both husband and wife work -- or if you work more than one job -- you'll enjoy that $65 boost in take-home pay from each employer. If a couples' withholding drops by more than $800 during the year, the reduction will be more than the value of the credit. That will result in a smaller refund or a bigger tax bill when the couple file their 2009 return next spring. It was concern about under-withholding that led the government to restrict the benefit for married couples to $600 for the rest of 2009. You can file a new W-4 form with your employer so that additional tax will be withheld from your checks.

Self-employed workers. The self-employed aren't subject to tax withholding, so there's no way to ratchet back withholding to pump up paychecks. But you're not out of luck. You can reduce your quarterly estimated tax payments (the first one is due April 15) by $100 each quarter if you're single or $200 each quarter if you're married. You do that when you file your 1040-ES forms during the year. Claiming the credit next spring will bring your tax bill down in line with your reduced payments.

Retirees. In the first version of the stimulus bill, retirees were left out in the cold; only folks who were still working qualified for the Making Work Pay credit. But by the time President Obama signed the legislation into law, Congress added a one-time $250 payment for pensioners. The money (electronic deposits to those who get their benefits direct deposited and checks to the rest) will go to recipients of Social Security and Railroad Retirement benefits, Supplemental Security Income and veterans pensions. Retired government employees who don't receive Social Security will also get $250. If you're married and file a joint return and both husband and wife qualify, you'll get $500.

What if one spouse is retired and the other still is working? The worker will enjoy $800 in reduced withholding, and the retiree will get the $250 payment ... but the couple's credit next year will be just $550. Effectively you'll wind up paying back $250 delivered by lower withholding via a higher tax bill or reduced refund in the spring of 2010.

These payments will likely go out starting in May. The law says they must be made by June 17.

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First-time home buyers credit

The new law makes a huge change in this powerful credit. People who bought first homes after April 8, 2008, and before the end of the 2008 get a $7,500 credit on their 2008 tax return. The trick is that the credit has to be paid back over 15 years starting with 2010 tax returns. You'll get your $7,500 now ... and add $500 to your income tax bill each year between 2010 and 2025.

Folks who buy first homes between January 1 and November 30, 2009, get an $8,000 credit -- and they never have to pay it back (unless they sell within three years of the time they buy the house).

And, get this: It really doesn't have to be your first home. You qualify for this tax break if you haven't owned a home for at least three years. The right to claim the credit is gradually phased out as adjusted gross income rises from $75,000 to $95,000 on a single return or $150,000 to $170,000 on a joint return.

Qualifying taxpayers claim the credit (10% of the house price up to a maximum of $7,500 for 2008 buys and $8,000 for 2009 purchases) on Form 5405. This should put money in your pocket within weeks of the time you file your tax return. If you owe more tax with your return than your credit amount, it will instantly reduce your tax bill dollar for dollar. If you owe less than your first-time homebuyer's credit, you'll get the balance via a tax refund. Filing your return electronically and having the refund directly deposited to your bank account is the fastest way to get your money.

What if you bought in 2009 and filed your return before the credit was bumped from $7,500 to $8,000? Don't worry, you can get the extra $500 by filing an amended return. Wait until you get your refund from the first return, then file a form 1040X to claim the final $500.

Extra $25 a week for the unemployed

The new law extends the period for which workers who have lost their jobs can collect unemployment benefits and adds $25 a week to those checks.

The increase will appear as early as next week in some states -- Indiana for one -- and early in March in other states. In Illinois, for example, where unemployment benefits range from a minimum of $66 a week to a maximum of $534, the additional $25 a week will go into checks in the first week of March, according to Greg Rivara of the state's department of employment services.

You don't have to make any special application for the increased benefit. The $25 should automatically be added to your checks. Although states set their own rules for how much the unemployed receive, the $25-a-week boost applies in all 50 states and the District of Columbia.

The new law also makes up to $2,400 of unemployment benefits tax-free. If you received jobless pay in 2008, however, the full amount is still taxable on your 2008 return. The new break applies only to benefits received in 2009.

Subsidy for COBRA health insurance

The new law adds a valuable benefit for workers who lost their health insurance when they lost their jobs. A federal law called COBRA generally requires companies with at least 20 employees that offer health insurance as a fringe benefit to continue to offer coverage to workers who leave or lose their jobs. Relatively few employees take up their former bosses on this deal, though, because of the high cost of COBRA coverage. While employers often pay two-thirds or more of the cost of health insurance for their employees, in most cases an ex-employee has to pay 100% of the cost, plus a 2% administrative fee.

But the new law rides to the rescue. For employees involuntary terminated (other than for gross misconduct) from September 1, 2008, through December 31, 2009, the federal government will pick up 65% of the COBRA tab. If you would otherwise have to pay $1,200 a month for family coverage under COBRA, for example, your cost will drop to $420; the feds will pay the other $780. Because the subsidy can last for as long as nine months, this would be worth more than $7,000 in this example.

If you're paying for COBRA coverage now, your premiums should fall in March. Employers actually have to pay the 65% federal share, then recover their outlays by reducing their tax payments to the government.

Normally, you have to elect COBRA coverage within 60 days of the time you leave a job. But, folks who lost their jobs since last September and did not opt for coverage get another bite at the apple. Employers are required to locate eligible ex-employees and give them up to 60 days to sign up for COBRA at the reduced price.

As with so many tax breaks, there is an income cap for this subsidy. If your income for the year exceeds $145,000 if you're single or $290,000 if you're married, you have to repay any COBRA subsidy received as additional tax with your next tax return. If income exceeds $125,000 on a single return or $250,000 on a joint return, at least part of the subsidy will have to be repaid.