For 2009 and 2010 the making work pay credit was applied to the majority of American's tax returns. This was a refundable credit worth up to $400 per individual or $800 for those filing "Married Filing Jointly (MFJ)." For the 2011 tax year this credit has gone away.
When we see clients year after year, they often wonder why their refund or amount owed fluctuates. They do not understand how it can be different from prior the prior year. The disappearance of the Making Work Pay credit is a good example of why a refund or amount owed can be different. Take as an example a married couple who made $45,000 in 2010. On their 2010 tax return they received a refund of $650. In 2011 they made the same amount of money and expect to receive a similar refund. However, when their taxes are filed they owe nearly $150. What happened? Why is there such a big difference?
The difference is that in 2010 they received a refundable credit of $800 (MFJ) from the Making Work Pay credit that was applied to their tax liability. In 2011 that credit has gone away and now they owe instead of get a refund.
Many people who saw that they were getting a refund the last couple of years went to their employers and changed the amount of their paycheck withholding. If you did that, beware as you may have an even bigger tax liability in 2011. In the above example, the couple saw that they were getting refunds of $650 so they decided they would rather have the money during the year instead of sending it to the IRS. Because of this, they reduced their annual withholding by $650. When they file their taxes in 2011 they are surprised that instead of breaking even they now owe $1,300. This is a result of the Making Work Pay credit going away. They suddenly owe $650 more and they reduced their withholding by $650. This can come as quite a shock to the taxpayer.
Don't be angry at your tax preparer for not "getting you the same refund" as the previous year. There are many factors that come into play in calculating your taxes. The best thing to do is find out what changes are coming for the current tax year before you make any withholding changes with your employer. Don't be afraid to communicate with your tax preparer throughout the year.
When we see clients year after year, they often wonder why their refund or amount owed fluctuates. They do not understand how it can be different from prior the prior year. The disappearance of the Making Work Pay credit is a good example of why a refund or amount owed can be different. Take as an example a married couple who made $45,000 in 2010. On their 2010 tax return they received a refund of $650. In 2011 they made the same amount of money and expect to receive a similar refund. However, when their taxes are filed they owe nearly $150. What happened? Why is there such a big difference?
The difference is that in 2010 they received a refundable credit of $800 (MFJ) from the Making Work Pay credit that was applied to their tax liability. In 2011 that credit has gone away and now they owe instead of get a refund.
Many people who saw that they were getting a refund the last couple of years went to their employers and changed the amount of their paycheck withholding. If you did that, beware as you may have an even bigger tax liability in 2011. In the above example, the couple saw that they were getting refunds of $650 so they decided they would rather have the money during the year instead of sending it to the IRS. Because of this, they reduced their annual withholding by $650. When they file their taxes in 2011 they are surprised that instead of breaking even they now owe $1,300. This is a result of the Making Work Pay credit going away. They suddenly owe $650 more and they reduced their withholding by $650. This can come as quite a shock to the taxpayer.
Don't be angry at your tax preparer for not "getting you the same refund" as the previous year. There are many factors that come into play in calculating your taxes. The best thing to do is find out what changes are coming for the current tax year before you make any withholding changes with your employer. Don't be afraid to communicate with your tax preparer throughout the year.
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