Federal taxes take big cut of PFD

Many people may not be prepared to cover the income tax liability

Posted: Monday, February 02, 2009

ANCHORAGE - Alaskans were thrilled to receive a supersized $3,269 Permanent Fund dividend last year.

Now comes a super downer: A big piece of those payments belongs to Uncle Sam this year in the form of federal income tax.

Taxpayers, especially people with kids, began receiving the bad news at a free tax preparation event the United Way of Anchorage and AARP held Saturday at the Northeast Community Center in Muldoon.

Denise Ray, 33, a fifth-grade school teacher, was disappointed after one of AARP's volunteer tax preparers finished her family's returns. Ray must shell out $308 in tax on each of the dividend payments her two children received last year.

"I didn't know it would be this much," said Ray, her 4-year-old daughter, Lillian, fidgeting by her side. She plans to pay her kids' tax out of her own tax refund.

Other taxpayers might not be able to cover the dividend tax liability so easily, fears Jan Watson, Alaska coordinator for AARP's Tax-Aide program.

She saw many Alaskans spending like mad at stores such as Best Buy last fall, when the $3,269 payments - comprised of a record $2,069 Permanent Fund dividend plus a $1,200 "resource rebate" of surplus state oil revenue - hit bank accounts and mailboxes.

Watson worries many people didn't set aside any of the money to cover the tax hit.

"There are a lot of people out there who have not saved a dime," she said. "If you went out and spent all of it, you're going to be in a world of hurt."

Saturday's gathering was the first in a series of free tax preparation events planned at various locations around Anchorage this tax season, and AARP volunteers expect to help many people cope with the dividend tax bite.

Because of the size of last year's dividend, parents in almost all cases will need to file a separate Form 1040 tax return for their children, Watson said. Usually, the Permanent Fund dividend is below the $1,700 threshold over which a separate tax return is required for a child, she said.

Having to file more Form 1040s was a new experience for some parents Saturday.

Bernard Welch, who works at North Star Behavioral Health, and his wife, Wonda, an operating room assistant, were surprised and a little annoyed at the extra paperwork, not to mention the $313 they owe on each of their two children's dividends.

The couple said they realized when the dividends came last fall that they'd later have to pay a price to the IRS.

"Let's face it, there's no such thing as free money," Bernard Welch said. "We knew they were going to get us somehow. We found how today."

He added: "A 10-year-old filing a tax return? Come on, that's ridiculous."

The Welches say they can pay, but they wonder how larger families will handle the dividend dunning.

"If you've got eight or nine kids, ooohhh!" Wonda Welch said.

The amount of tax owed on a kid's dividend depends to some degree on how much the parents earn. Lower-income parents generally can expect to pay less, but the minimum owed in almost all cases is $236, Watson said.

The rare exception is, for instance, a single parent with zero taxable income for the year. In that case, the child's dividend tax obligation can be as little as $90, Watson said.

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