The Unknown Tax Break
A few years ago, President Obama decided to boost the economy by proposing the “Making Work Pay Credit” – a tax incentive intended to put money into people’s pockets. The credit was “delivered” by changing withholding rates so taxpayers would get a little more cash in each paycheck. However, it ended up frustrating some people because the withholding tables employers were provided did not always match the amount of the credit.
For example, a two-income family may have taken home an additional $1,200 but only qualified for the maximum credit of $800, resulting in a family possibly owing $400 more at tax time. Similar problems existed for single people with multiple jobs because withholding was reduced by each employer, even though they could only get one $400 credit. Dependents with jobs also had issues because their withholding was reduced even though they were not even eligible for the credit.
To make things worse, the credit was completely missed by many of the Americans it was intended to assist. Two of my relatives (a bank teller and a school bus driver) and a co-worker missed the credit because they did not read the more than100 pages of filing instructions before they prepared their own returns. With tax rules constantly changing and a new tax credit with a not-so-sexy title, it is not surprising that they did not even know this credit was available to them.
Two years later, it was clear that the Making Work Pay Credit did not work the way supporters had hoped; Congress said yes to a reduction in payroll taxes instead. For 2011, they lowered the Social Security withholding rate to 4.2% (down from 6.2%), which could mean an annual savings of up to $1,400 for a family earning $70,000 in wages. This approach of lowering payroll taxes is actually an improvement over the credit because taxpayers do not have to do anything – the employers do all of the work.
However, the tax cut is only temporary and set to expire at the end of this year. As part of the American Jobs Act of 2011, however, President Obama recently proposed to cut the tax rate for 2012 even lower – down to 3.1% (that’s a 50% rate cut). We will have to see what Congress does with the bill to know how much we will pay in payroll taxes next year.
Meanwhile, take a close look at your paycheck and make sure you know where your hard-earned money is going! Review your withholding and track it during the year so you don’t have too much or too little withheld. You do not want to be surprised by an unexpected tax bill or a smaller refund come tax time. The IRS has a FREE (my husband’s favorite word) withholding calculator tool that can assist you with this. Any finally, you (or better yet, your CPA) can still go back and amend your returns for 2009 and 2010 if you missed the credit – it is not too late!
Melissa M. Labant, JD, CPA/PFS, Technical Manager – Taxation, American Institute of CPAs. Melissa works with individual, employee benefits and exempt organizations tax technical resource panels in developing AICPA tax policy positions, shaping and communicating the Institute’s initiatives, and providing products and services for members. She obtained her law degree and B.S. in Business Administration from St. Louis University.