A few months ago I published what I thought the 2011 Federal Income Tax brackets might look like. At the time I thought that taxes may be going up because congress was having a hard time passing a tax package of any kind. Others were projecting that the rates were going to go up as well.
Thankfully, Congress and the President signed a tax package into law on December 17th, 2010, that extended the tax rates for all taxpayers, meaning most people shouldn't see an increase on their taxes in the coming year.
Even though the current tax rates were extended, some people are seeing a 2011 federal income tax increase in their paychecks already, and there is a lot of confusion about how that could happen when the rates are essentially the same.
Unfortunately, although the rates are staying the same, not everything else has remained as it was. There were expiring temporary tax credits that will mean some people will see (or already have seen) an increase in the federal tax on their paycheck.
2011 Federal Income Tax Increase
As mentioned despite the rates remaining essentially unchanged except for rate range increases due to inflation, a lot of people will still see a difference in their paychecks this year. Some folks will see their taxes go down, while other lower income folks will have an increase in withholding from their paycheck.
The Making Work Pay credit expired on December 31, 2010; therefore the 2011 income tax withholding tables do not reflect this credit. As a result, employees in a lower income tax bracket may see an increase in their tax withholding amount, while employees in a higher tax bracket may see a decrease.
So it all really depends on how much you make, and how much of a cut you got in previous years from the Making Work Pay tax credit.
Making Work Pay Tax Credit Being Gone Means Higher Withholding For Some
As mentioned the Making Work Pay tax credit was available for the 2010 tax year, but is now expired. That means taxpayers will no show the reduced withholding due to this tax cut. How much was the tax cut, and who got it?
- The February 2009 stimulus bill gave a $400 credit per worker and a $800 credit per working couple.
- The full credit would be paid to people making $75,000 or less ($150,000 per dual-earner couple).
- A partial credit would be paid to those making above those amounts but no more than $100,000 ($200,000 for couples).
- The credit was also refundable, meaning even very low-income families who don’t make enough to owe income tax would be able to claim it.
For most people that had a job and received the cut, it was paid over time at roughly $15 per period, assuming 26 pay periods in a year. For some folks since the cut was enacted a couple of months into the year, the amount added to their checks was larger. Since the tax cut is expiring, you won’t have that extra $400-800 in your paychecks in 2011. As mentioned that means a lot of people's federal tax withholding will be about $15-40 more.
Cut Of 2% In Social Security Payroll Tax
One thing that was passed as a part of the tax act in December was the 2% payroll tax holiday for 2011. It was put in as kind of a replacement for the expiring $400-800 “Making Work Pay” tax credit.
Many people will see this new tax cut completely replace the credit or better, but for some who have low incomes or don’t pay taxes, they won't see as much as the Making Work Pay tax credit. In fact, some who don't pay taxes will see nothing at all with the new cut since they don't make enough.
How much of a cut does the 2% payroll tax holiday actually give for the average taxpayer? By some estimates it will mean an average of $1000 in tax savings. Since the Social Security tax is capped at $106,800, the maximum savings that could be seen by a higher income individual is around $2136. The previous “Making Work Pay” tax credit meant a $400 credit for singles and $800 credit for families.
Some Will Pay More Taxes. Some Will Pay Less
So because not everything stayed the same after last year's tax package, not everyone will be paying the same amount this year – despite the rates being extended for everyone. While new tax cuts have been passed to replace the old tax credits, because they are setup differently it will mean that some people will be seeing an unexpected increase in their federal taxes, while others will be coming out ahead. So depending upon your situation, you could be extremely happy with the tax package that was passed, or you'll be frustrated because you have less in your paycheck or pension check.
Do you think that the federal government adequately explained how people's tax withholding might be changing in the new year? Do you think it is taking a lot of people by surprise? Have you shown an increased withholding? Tell us about it.