In 2009 & 2010, there was a tax credit used by millions of taxpayers that will not appear in 2011. The ‘Making Work Pay’ tax credit was a two year deal enacted by Congress to encourage people to work during the tough economic conditions, and eligible taxpayers received an additional $400 as part if their refund ($800 for married, filing jointly). The credit expired and is not available starting in 2011.
So, if over the last few years you got a big federal tax refund, it could have been ‘padded’ by this tax credit.
However, the government did change payroll tax rates to try to make up for losing the Making Work Pay credit – remember that your Social Security tax rate went down 2% starting in 2011 (from 6.2% to 4.2%)? Your paychecks should have been a bit higher each week, and you would have made up the $400 per person if you earned at least $20,000 per year. Over $20,000, you continue to pay the reduced rate of 4.2% and you would have made significantly more than $400 per person, but in small increments.
Thinking back a few years, the government changed our federal tax withholding tables so you should have been getting more each pay period (the so-called ‘Obama Tax Cut’ from 2009). I remember processing people’s tax returns for 2009 (spring of 2010) and explaining to a lot of folks why their expected tax refund had gone down (despite the first year of the Making Work Pay credit). No amount of explaining seemed to convince some clients that their refund wasn’t ‘lower’, but it had been given to them earlier in the year…
I’m expecting the same discussions this year – a large number of people will receive smaller tax refunds than in the past because of not getting the Making Work Pay tax credit, despite getting slightly larger paychecks during the year.
If you are expecting (or counting on) a big tax refund, be prepared in advance for it being lower than expected due to the expiration of the Making Work Pay tax credit.
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If you need help with your taxes, please let me know – happy to see if I can help.
Thomas C. Hodge
The Hodge Group