The proposed budget agreement on Capitol Hill is kind of like a holiday fruitcake; it looks good on the outside, but is it really fit to eat? It sounds good: Social Security withholding will be 2% less for the year. However, the proposal also lets the Making Work Pay (MWP) credit expire for 2011. The Making Work Pay Credit provided a maximum credit of $400 per person or $800 per couple toward federal tax liability. By comparing the numbers, it's clear that this agreement as described actually make taxes higher for a percentage of tax payers. Here are some examples:
- A married couple making $36,000 per year will have reduced Social Security tax of $720, but will lose the MWP credit of $800. Their tax will go up by $80.
- A single person making $36,000 per year would have a reduced Social Security tax of $720, but will lose the MWP Credit of $400. This person's tax is reduced by $320.
- A married couple making $75,000 per year would have a reduced Social Security tax of $1500 but will lose the MWP credit of $800. Their tax is reduced by $700.
- A married couple making $150,000 per year would have a reduced Social Security tax of $2136. They were not eligible for the MWP credit so their tax is reduced by $2136.
- This proposal actually raises taxes for lower income married individuals. However, it is more advantageous for both single filers and those in higher income brackets.
'We cannot accurately forecast the results until the budget agreement is passed and the 2011 withholding rate tables are released by the IRS' said Sam Kerch, CPA, the Director of Tax Compliance for paycheckcity.com and Symmetry Software. 'On the surface it looks good but you should examine the details to see how your paycheck will be impacted.'
When the new tax rates do become available, check out the updated paycheck calculators at paycheckcity.com to be sure you're withholding the correct amount to optimize your take-home pay.