Taxes 
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Why Your Tax Withholding Went Up

There have been a lot of commenters wondering why their tax withholding went up this year after hearing about the stimulative 2% payroll tax holiday passed last year. The 2% payroll tax holiday reduced the normally 6.2% Social Security withholding to only 4.2% but some people have seen their withholding go up. What gives?

Last year, the Making Work Pay credit reduced everyone’s income tax by 6.2% up to $400. Anyone who earned over $6451 received a maximum $400. That credit expired this year and was effectively replaced by a 2% reduct that had a much higher ceiling, $2,136.

How the difference affects you:

  • If you earn more than $20,000, then you should see a reduction in your withholding because a 2% of $20,000 is $400.
  • If you earned less than $20,000 then you’ll see an increase in your withholding because the 6.2%, even with a $400 cap, is higher than the reduction of 2% in Social Security.

Finally, your employer may not have implemented the payroll tax holiday yet, the IRS gave them a January 31st to fix it with any differences reconciled by March 31st. While your Making Work Pay credit has definitely been removed, the payroll tax holiday may not be implemented yet.

Who said taxes weren’t fun? :)


 Taxes 
390
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Official 2011 US Income Tax Brackets (IRS Tax Rates)

Tax BracketsWith every new year comes a little tweaking of income taxes and this year is no different. Three weeks ago, we didn’t what was going to happen to our tax rates since Congress had yet to act on the expiring Bush era tax cuts. With the clock winding down, they opted to extend them by two years and so the only change you’ll see is an adjustment for inflation.

These tax brackets are for the tax year 2011, here are the current tax brackets.

This year we’ll be presenting them a little differently. Some readers are here just to find out their marginal tax rate and others want to find out how much in taxes they’ll be paying. So this year you’ll see a listing of all the marginal tax rates first, followed by a breakdown of taxes due (without accounting for deductions and other adjustments).

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 Personal Finance 
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Lower Tax Rate on Savings Accounts to Incentivize Saving

Over the break, I read about the winning idea for the TIAA-CREF’s Raise the Rate competition and was surprised that it was selected as the winner. I’m surprised because I wouldn’t think that savings would be a reliable factor in the probability that you would default, which is what the credit score is designed to measure, and because it would be a bit of a bear to implement.

My submission was to lower the tax rate you paid on the interest you earned from savings account. You already receive this information as a 1099-INT, so the IRS already knows this is interest earned from an interest bearing account. While it would fail the “difficult to implement” test (which we don’t know if it was factored), I bet you more people would save money if they knew they would be taxed less on the interest. (Many people invest in dividend yielding stocks for this very reason)

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 Taxes 
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Itemizing Taxpayers Must Wait to File Tax Returns

You know how it took until the 11th hour for Congress to extend the Bush era tax cuts? One of the consequences of that late change to the tax structure was that the IRS had been preparing for the the tax cut to expire. That means that they’re not ready to process tax returns based on current tax law.

I usually tell people that they should get their tax documents in order as early as possible if they expect a refund. There’s no reason to wait until April 15th to file if you’re waiting on a refund. The average tax refund last year was over three grand… why wait until April to get your own money back?

Sadly, while you might be ready whenever you receive your W-2 and 1099s in early February, it turns out that the IRS won’t be. According to CNN Money:

The delay affects both paper and electronic filers who itemize deductions on Form 1040 Schedule A. That includes those claiming the new Educator Expense Deduction, which credits grade school teachers for out-of-pocket expenses of up to $250.

It also includes those claiming deductions for college students, covering up to $4,000 of tuition, which is claimed on Form 8917, though the IRS said there will be no delays for those that claim other education tax credits.

It stinks but you can blame your Congressional representatives for it!


 Taxes 
31
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Why You Shouldn’t Cheat On Your Taxes

Taxes!Have you ever been tempted to cheat on your taxes? asks a recent article in the NYT’s You’re the Boss column. Like almost everyone else, I’ve been tempted (everyone has been tempted or thought about it… if you haven’t, then you’re a much better person than the majority!) but I’ve never cheated on my taxes.

Here are just three reasons why:

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 Taxes 
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The 2011 Stimulus Check: 2% Payroll Tax Holiday

Money Money MoneyWhen Congress passed an extension on the Bush tax cuts, it also passed a new one year tax “holiday” on your payroll taxes. I’m calling it the 2011 version of an old friend to many Americans, the stimulus check. Back in 2008, after the passage of the 2008 stimulus package, many Americans received $300 in the form of a stimulus check. In years since, that stimulus check has been morphed into the Making Work Pay credit (resulting in $400 per person).

For 2011, the stimulus check has returned and this time it’ll be called a payroll tax holiday with a benefit of up to $2,136 per person.

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 Taxes 
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The Standard Deduction

Tax deductions are wonderful, aren’t they? While they’re not as good as a nice tax credit, tax deductions can reduce your tax liability significantly depending on your income tax bracket.

In the United States, you have two options when it comes to claiming deductions. You can go the easy route of claiming the standard deduction, which is a set amount each year that requires no documentation, or you can itemize your deductions, which allows you to select which deductions you want to claim and requires you to back it up with documentation.

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 NEWS 
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Bush Tax Cut Extension Appears Likely

Update 12/9: House Democrats rejected the deal, so we’ll have to see what happens from here.

Update 12/6: A deal has been made – Bush tax cuts will be extended for two years for all income levels and unemployment benefits will be extended.

It appears that a compromise on the Bush tax cuts is likely and that compromise will take the form of an extension. CNN Money quoted Senator Orrin Hatch (UT-R) as saying that neither “side” has enough votes to pass the plan they want so they’ll probably extend the cuts another two years and deal with it then. Senator Ron Wyden (OR-D) is also referenced as calling for a one year extension of the tax cuts to give Congress more time to put together a deal.

What does this mean for the tax brackets? The brackets would stay the same and the ranges would increase to track alongside inflation, as reported by the BLS. Capital gains rates would also stay the same at 0% and 15%, depending on your marginal income tax rate.

Sadly, this seems to be the modus operandi of Congress on issues like this – just take a look at AMT and how often “relief” has been extended as a stop gap measure in the waning minutes of the year.


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