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.
Financial Samurai says
Looks like only a way minority of people will pay more. And it’s likely b/c they were paying hardly ANYTHING in the first place.
If we just taxed the 100 million Americans who don’t pay taxes just $100 a YEAR, we’d raise a nice $10 billion bucks. Just $1,000 a year and that’s $100 billion bucks. So easy!
Peter Anderson says
It is the folks for the most part that are lower income, retirees or who don’t pay taxes who will end up paying more this year, as mentioned. Most other folks will break even or come out ahead vs. last year.
Betty Costanza says
I am a retiree on a fixed income. I have not received a cost of living increase for 2 years. My income for 2011 has been reduced by $1200 because of increased withholding of taxes. Now I am making less money than last year and can hardly manage my finances. How do they expect the seniors to live on reduced income. It should at least stay satus quo if cost of living is taken away. How do we make President Obama and Congress realize that the seniors of this country are now struggling?
MARIE SAMPSON says
we tell then in 2012 by voting them out
Don’t blame Obama. He’s done the best he can with the Republicans stopping every bill that has been proposed to help everyday citizens have a better life. We should not fear Government but rather Big Corp because they are without conscience.
bill l says
Betty, I agree with you. I am a retired Marine and my retirement has not increased in three years and yet I have been notified that my income will decrease in 2011 because of changes in the 2011 tax table. Where are the “No new taxes” people now? President Obama and Congress don’t care about you and me, they only care about their re-election and the people who finance their campaigns. You don’t see them cutting their pet projects and their perks! This would save millions! They should ALL take a 50% pay cut as they are not doing the job they were elected to do. I’m talking about all Republicans, Democrats and Independents. Term limits for all. Eliminate the income taxes and initiate a Federal sales tax. That is the only fair tax, as the more you spend (the wealthy) the more taxes you pay, conversely, the less you spend (the poor) the less taxes you pay. This would also decrease government spending by getting rid of the IRS! (Which cost us billions each year.)
It looks to me that in 2010, only people who earned under $100k would see any of this credit, but everyone benefits from the 2% cut. I’m surprised they didn’t put a cap on the 2% cut.
Fred @ One Project Closer says
Peter, really good explanation of this issue and I didn’t realize this was the case. It seems to be that the cut-off line is right around $20,000 for singles and $40,000 for marrieds – right? Because 2% of $20,000 is $400, and 2% of $40,000 is $800. So if you make at least $20,000 in FICA-taxable earnings (wages), then you’re paying less this year, if you make more, you’re paying more.
As F.S. pointed out, the folks negatively affected by this change were probably paying very little federal tax in the first place; however, these people are also the poorest in our society…
Donald Trump once remarked, “If you want to get rich, you need to lower your taxes to the legal minimum.” Even if becoming wealthy isn’t at the top of your to-do list, there’s no reason to pay more taxes than you need to.
Everyone should have a home business to increase their income and more importantly, to save thousands every year with home business tax deductions.
“Render to Caesar the things that are Caesar’s, and to God the things that are God’s” Mark 12:17
Just be sure that you understand how to apply tax deductions DURING the year, so that you legally minimize your taxes.
Money Crisis Game Plan says
Great explanation of the tax changes Peter!
With food and gas prices increasing, people have less cashflow than ever.
If you’re overpaying and getting a large tax refund every year, you might want to adjust your Tax Withholding on your W2 now, so that you have more of your money now to pay monthly bills.
Peter Anderson says
I also just read in another article online that the checks for many retirees had errors in them because of how late in the year the tax cuts were extended. Sounds like they’re aware of that and may be getting it fixed soon?
Thanks to dawdling by last year’s lame duck Congress, millions of federal retirees and survivors took cuts ranging from about $20 to more than $50 in their most recent annuity payments. The reason: Congress waited until too late to agree, and then vote, to extend the so-called Bush tax cuts which were due to expire this December 31, 2010. Although it did approve the extension in an 11th hour vote, it was too late for the IRS, which had to pre-program its computers based on the assumed new higher rate also in effect prior to the Bush tax cut.
So what’s next? Tax expert Bob Leins discussed the situation yesterday on his radio show. He expects the next checks retirees get will be based on the 2010 tax rates and that the retirees will get a refund of whatever they lost this month.
retiree check issues
Ronald R. Dodge, Jr. says
I am in the 15% income tax bracket area, though be it, my income is still below median income for our local area. I claim “EXEMPT” every single year on the W-4 form prior to the February 15th dead line as I meet both requirements to claim “EXEMPT” and I still see a hefty refund from the federal IRS. Come next year, will I come out further ahead or not as far ahead? I suspect I will come out further ahead next year, as we will have a bit more than $800 credit from this 2% FICA holiday, but I’m treating that 2% FICA holiday as a reduction to SSA benefits (as it may hurt SSA benefits and bring it’s bankruptcy up earlier), thus that 2% is going directly into my ROTH IRA account.
Shirley Rowe says
If the tax increase is due to the expired ‘Making Work Pay” tax credit, I would like to know why retirement pay is included? We are retired and in our 70’s why are we required to participate as if we are employed? Have we been dupped again by Obama and the democrates?
I just want to thank you for your article re: why taxes may be going up for some individuals. I could not understand why my elderly parents were experiencing an increase in withholding (my dad’s retired and my mom works part-time) but expiration of the Making Work Pay credit and possible last minute adjustments that did not make the payroll systems of federal retirees explains the difference.
Thank you again.
Looks like with the new increase in withholding again makes the poor get poorer and rich get richer, as the higher income people will not see an increase, just the lower income people and pension and retirement checks. we need some people in Washington who will help the common man.
Hello. Thanks for the article. I’m recently divorced, so this additional loss to my income is definitely going to be felt… I’ve lost an additional $200 a month due to these tax changes. It’s very frustrating–especially since I don’t feel these changes were explained very well.
robert crews says
I think my taxes are to high and now there taking more taxes each week. I have a wife and two kids and can’t afford more taxes. Its is making us to have to make difficult choices. Like to pay health insurance premiums or by food and paying utility bills. For 2012 I will not be ableso to have health insurance for my family because my federal taxes are