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December 28, 2011 07:42 PM UTC

Your Taxes Will Be $800 Higher for 2011

  • 6 Comments
  • by: caroman

Did you know that your tax bill will be $800 higher in 2011, even if you made the exact same income?  That’s because the Making Work Pay credit didn’t exist in 2011.

Background: For 2009 and 2010, the Making Work Pay (MWP) credit was a $800 deduction from taxes for joint filers ($400 for singles) who made less than $190,000 ($95,000 for singles).  Congratulations to you if you even knew it existed because it only showed up as an obscure line item on your Form 1040.  So, for the past two years, most joint filers paid $800 less in federal income taxes without even knowing it.  

Well, that doesn’t exist in 2011 because the credit expired without a whimper.  Now, that hit to the middle/lower classes was tempered by the 2% payroll tax cut in 2011.  A family with $50,000 W-2 income saved $1,040 in taxes in $20/week increases in their paychecks.  

Here’s the kicker: Those families have already spent that tax break.  When they prepare their 2011 Form 1040 they’ll realize that maybe they should have saved $800 of that payroll tax break to pay for the elimination of the WPT credit.  Oops.

As obscure as this credit was, watch for this to become an issue in 2012 as more people learn the dirty truth about their 2011 taxes and scramble to pay the extra $800 for their 2011 federal income taxes.  

Comments

6 thoughts on “Your Taxes Will Be $800 Higher for 2011

  1. I can’t believe we didn’t hear anything about this. But then again, I guess I can believe it. $800 could mean the difference between getting my kid orthodonture this year, or having to wait a little longer. $800 is what some young people out of college spend on a clunker car to fix up. $800 is rent for many people. $800 is what they will owe on their credit cards for their kid’s Christmas presents.

    I won’t dis the messenger, but this sucks.

    1. I was beginning to be worried that this is a topic only CPA’s (like me) would love.

      Responding to Nancy, Ohwilleke, and Phoenix:

      In general, I believe it is good policy to put money in people’s hands during especially bad economic times like now.  To be effective, though, the money should be given to people who are going to spend it, thereby stimulating the economy.  And, the people who receive the money should be aware that they are getting this bonus so that their (consumer) confidence is increased, stimulating the economy even further.

      The Making Work Pay credit does put money into people’s hands who are going to spend it (hence, the cutoff to those making over $190,000).  But, no one actually knew that they received this bonus.  So, it had little positive effect on consumer confidence.

      The payroll tax credit also puts money into people’s hands (the effective cutoff is on wages over $106,800).  But, it is dribbled out in about $20/week paycheck increases that is unnoticeable by most wage earners.  This also does little to improve consumer confidence.  Moreover, now that it has become a political football, I don’t see when it will be politically feasible to ever reinstate the tax.

      I would have preferred to see large checks paid out to people last year and next year.  It has been said that people don’t spend those large checks, but I’m unconvinced from the studies I’ve seen.  Sure, personal income increases when they receive the checks because few go out and spend it all at once.  But, it will be spent in a few months, I believe.

      Can you imagine getting a check of say, $1,500 or $2,000 in the mail next week and what that would do for your overall sense of economic well being?

      Finally, using one (or two) time checks allows the giveaway to be stopped without cries of “raising everyone’s taxes”.

  2. to everybody is great policy, although it did have something to be said relative to policy failures like the homebuyer tax credit or cash for clunkers as pure stimulus that was top heavy.

    1. Cash for Clunkers did wonders for the auto industry just when they needed it most; it drove down inventory and probably kept a few factories running for a while.  It also improved the efficiency of vehicles on the road, which can’t be a bad thing.

      Handing out money isn’t the best policy, but if your choices are handing out money to the masses and nothing, handing out money is better stimulus than nothing.

      1. This assumes that the economy needs stimulation.  Handing out money pretty much indiscriminately like the $800 stimulus tax credit does is not good policy in good times – better to adjust the tax rates to whatever is sustainable and suitably balanced to maintain and/or grow a healthy middle class.

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