2011 Federal Income Tax Increase For Some Despite Tax Rate Extensions

A couple of weeks back I published the new 2011 Federal Income Tax brackets. Basically, because of the tax act that was passed on December 17th, 2010, the current tax rates are being extended for all taxpayers, both high and low earners.

What some people might not realize, however, is that despite the tax rates remaining essentially the same (except for some rate range increases due to inflation) some people will see a 2011 federal income tax increase due to expiring tax credits, and a 2% payroll tax holiday for 2011 that might mean less savings for some.

2011 Federal Income Tax Increase

Not everyone will see their taxes remain the same despite the fact that the tax rates remain unchanged.  Some folks will see their taxes go down, and others will see an increase in withholding from their paycheck.

The Making Work Pay credit expired on December 31, 2010; therefore the 2011 income tax withholding tables do not reflect this credit.  As a result, employees in a lower income tax bracket may see an increase in their tax withholding amount, while employees in a higher tax bracket may see a decrease.

So it all really depends on how much you make, and how much of a cut you got in previous years from the Making Work Pay tax credit.

Expiring Making Work Pay Tax Credit

As mentioned the Making Work Pay tax credit has now expired, which means taxpayers will no longer receive the benefits from this cut.   How much was it, and who got it?

  • The 2009 stimulus bill will gave a $400 credit per worker and a $800 credit per working couple.
  • The full credit would be paid to people making $75,000 or less ($150,000 per dual-earner couple).
  • A partial credit would be paid to those making above those amounts but no more than $100,000 ($200,000 for couples).
  • The credit was also refundable, meaning even very low-income families who don’t make enough to owe income tax would be able to claim it.

For most working individuals, the credit was paid over time at roughly $15 per period, assuming 26 pay periods in a year.   So since it is expiring, you won’t have that extra $400-800 in your paychecks in 2011.

2% Payroll Tax Holiday For 2011

The 2% payroll tax holiday for 2011 was meant in part to be a replacement for the expiring $400-800 “Making Work Pay” tax credit.  For some people it will more than replace the credit, while for others who have extremely low incomes or don’t pay taxes, they won’t see as much as with the previous credit (or nothing at all since only those who pay tax will get it).

What does the 2% payroll tax holiday mean for the average taxpayer? Around a $1000 tax savings.  Since the Social Security tax is capped at $106,800, the maximum savings that could be seen by a higher income individual is around $2136.    This as opposed to a $400 credit for singles and $800 credit for families under the “Making Work Pay” tax credit.

Some Will Pay Less Taxes This Year, Some Will Pay More

So because of the expiring tax credits, and because 2% social security tax holiday is calculated at a percentage of income as opposed to a flat rate, people will be seeing different withholdings this year.  Either they’ll be coming out ahead from previous years, or if they make extremely low incomes or don’t pay taxes, they’ll be getting less than previously.  Or nothing.   It really just depends on their situation.

Is the tax withholding situation – along with expiring credits and new tax cuts confusing?  Do you think the government adequately explained that some lower income earners may see a decrease in their paychecks?

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I’m a thirty-something Christian Midwestern father of one son, and have been happily married for 9 years to my beautiful wife. I love playing tennis, shooting hoops, or taking part in the occasional flag football game. Of course, I love writing and financial topics as well, and that's how this site came into being! Check me out on Google +!


Comments

  1. Alan says

    That makes sense. On my wife’s paycheck, although her net taxes went down overall(-10%), her federal portion of withholding went up 25%. Now next year when they add back in the 2%(SS) then she’ll end up seeing a net increase..seems sneaky to me. Based on 2010 rates and applying them back, then that will increase her overall taxes 8% in 2012(provided they keep the 2010 rate).

  2. Linda Wolovich says

    I, as well as my husband, did see an increase in our federal taxes starting in January 2011. As a result, we are now bringing home less money in our paychecks this year. Am I getting this right? The richer people are getting a tax break while the lower income people are paying more?? How is that fair?????

    • says

      Everyone is getting the same tax break – a 2% cut in social security taxes. Those who make more and pay more in taxes will end up seeing more in their check. Not sure about if it’s fair or not, but in any event, at least you shouldn’t be seeing too much of a reduction in your check? Most people i’ve talked to it hasn’t been more than $10-20 per check?

      • terry says

        I forgot to mention in a previous post, that I was retired, so if you are on a pension you don’t pay into social security and so there is no offset as for people who work. I don’t get social security, am middle class, so once again, middle class is not getting a break.

      • says

        I just received my pension payment for January. The increase in my federal tax was $31, a 40% rate increase! I echo the Ms. Wolovich’s comment “The richer people are getting a tax break while the lower income people are paying more?? How is that fair?????” My congressional representatives will definitely be hearing from me. Again, tell me how this is fair?

  3. Kate says

    As a teacher, my income isn’t high. My net income went down by $60 and several of my co-worker’s checks decreased by as much as $100. Maybe it is more than the approximate $30 stated because we are only paid on a monthly basis where most people are paid bi-weekly. However, that is a significant amount in many households. I am extremely frustrated that the government continues to expect working people such as myself to bail out others while my children pay the price. That extra $60 will most likely have to be made up in our family budget through entertainment cuts. My children will sacrifice while the children of congress members and President Obama continue to take lavish vacations to Hawaii, living life as extravagantly as always.

  4. Alan says

    Yep. Doesn’t make too much sense to me. And if they start taxing any benefits that your employer provides(medical, dental, etc) as ‘income’, then I hope all hell breaks loose. We help a lot of other nations; we carry them on our backs. How about we take care of Americans first and if there’s anything left after that, then we help others.

    I am self employed, so I pay self employment taxes, boy was that a surprise; paying the employers side as well as the employees side of SS/Medicare on top of regular income taxes, hello 25%. Ugh.

  5. Joan says

    No, the government absolutely did not notify us appropriately. In my opinion, they really do not care what we think on any day other than election day. I am a lower middle class income single mother who annually has to pay back taxes on April 15th because I have to claim a high number of exemptions to be able to support my daughter without Child Support. I have a Child Support case, and am a tax paying citizen, and employee, of the County I live in, but the DA’s office that runs on our tax dollars does not respond or provide assistance. Due to this tax change, I am having an additional $40 a month deducted due to this tax change, which is A LOT of money to me. This clearly seems to benefit those in classes above and below those of us in the middle class sector. It seems to me the middle class society is paying not only for the people not working, but also for the retirements of those that did not serve us honestly and appropriately during their elected terms. I have no faith in our leaders, or even our government processes anymore, and this additional deduction from my income removed all hope for a positive future for me. It really angered me. I vote with passion again when we can vote at the end of a politician’s term as to whether they represented the people or not. And if not, why would we continue to pay them in “retirement”? Otherwise I think the system is just abusive, we really do not matter, and it is disheartening. I am very afraid for my daughter’s future…

  6. Bruce says

    Heath care has gone up every year, out-of-pocket costs have increased, no COLA for the past two years, rent, food and gas prices have increased and now my federal tax just went up by $50/month. Thank you congress for watching out for my best interest. When I’m forced to eat dog food I’ll be sure to send you case. You’d probably like it!

    • al says

      for sure 34 yrs fed emplyee served in vietnam……pension was tuff to stretch ….somehow no cola but i can take them to wal-mart show them increases…health care goes up every yr..utilities..etc..my family has had war vets back to ww1…i have watched our gov squander my kids and grandkids futures…i’am done with voting for greedy rich politicians..that don’t give a damn about anyone except their own greedy selves!

  7. says

    whoa……….. whats going on??? Mid amercia catches it in the wheat basket and of course higher income brackets benefit. where in the world is the equality here… I am furious with our law makers particularly with our republicans who can only favor the rich. first you kill our cola’s for at least two years then you increase our taxes. the price of daily essentials such as food, gas etc continues to go up daily…. are you really trying to balance the deficit on the middle class workers and retired people? why not stop some of our give away programs to foreign countries and oil companys?

    • Beverly says

      Robert: Why are you blaming Republicans when they are the ones who kept the Bush tax cuts in place since they were installed in Jan. The Democrats were going to raise all our taxes if the Bush cuts went away. At least that’s the way it sounded to me on TV. What happened to Obama’s campaign promise to retired people who made less than $45,000 who, if he was elected, would pay NO tax at all. I’m still paying tax and I make less than $45,000. So, both parties are to blame. They all make enough money not to have to worry about $30 a month, but I do.

  8. dennie morgan says

    i’m disabled and are on s/s disablity and get disablity retirement from my company, my wife is also desabled and gets s/s disablity but its been like this for several years. when i got my check this time my federal income tax had gone up 50 dollars. don’t we ever get a break or are we expected to keep up with all the tax increases, gas prices, grocery prices,etc?

  9. Shirley says

    We just got our retirement pay and I have to admit I was shocked, we are just about 100.00 less every month. What happened to fair?? It’s alot of money on the amount we get every month..

  10. Barbara says

    I’m making less than 30,000 a year. Now more federal tax is being withheld from my pay, along with a higher health insurance premium. My house payment just went up as well, due to higher insurance and property taxes. We are barely hanging on to begin with, need a better car, a new bed, just had to buy a new washing machine, and have increased out of pocket medical expenses. This is not good. And they say there’s no cost of living increase? Who are they kidding? :( I feel as if I’m sinking….

  11. Greg says

    The making work pay (MWP) tax credit began in the spring of 2009. Everyone got $400. Since the year had already begun, though, they started to give more than $400/12 per month so that by the end of the year, they’d roughly put $400 more in your pockets. But when 2010 began, they didn’t adjust the rate for the MWP. This led to them taking out even less in federal taxes in 2010 than in 2009. Now, in 2011 the MWP credit is gone, so they’re just increasing federal taxes by the same amount. It’s actually too much, but it’ll all come out in the wash when you file your income taxes in 2012 for 2011. All that you need to have taken out of each check to make up $400 annually (26 pay periods) is $15.38, which is $33.33/mo. If you want, have your payroll dept take out the difference between what they’re taking out and $15.38 (if you get paid bi-weekly). Or, just get back more in your refund (or pay less) next year.

  12. Greg says

    Correction to my other post. The second to last sentence should read:

    If you want, have your payroll dept take out the difference between the extra amount that they are taking out now and $15.38 (if you get paid bi-weekly).

    If the moderators can edit my other post that would be preferable to this correction.

    Greg

  13. Cleo says

    I live on Social Security with two pensions. When I say pensions, they are small ones although, I worked for more than 45 years. One being $503, Until I got my statement of Federal tax increace today, which left me with 475. The other one was an increase of $20.00 on Federal taxes and it’s almost half of what the other amount is. To me this is rediculious. I am of one person household paying land taxes that go up every year and insurance. Everything going up and nothing else coming in. I feel like the lady’s comment above..I feel like I’m sinking. Some changes better be coming before we all sink.

  14. Barbara A. Orla says

    Greg, you don’t seem to understand that us elderly folks and those on a very low salary can’t make it anymore, and the government doesn’t care. $32/month to me is a lot of money. Maybe your salary is higher so you don’t understand. As far as I’m concerned, the government did us no favors by giving us $400, as in about a year of paying the extra taxes, the government will have taken the money back. Indian givers!

  15. Michael says

    My AZ state pension chk for Feb shows a $41 decrease due to a FEDERAL tax increase – that’s a huge jump! Guess in about 3 yr we’ll be eating dog food.

  16. Rocki Rose says

    The federal income tax on my monthly pension check went from $48 for CY 2010 to over $97 for 2011. That’s got nothing to do with Making Work Pay. What gives? Where’s the tax cut extension?

    • says

      I did read in another article online that the checks for retirees had errors in them because of how late in the year the tax cuts were extended. Sounds like that may be fixed soon?

      Thanks to dawdling by last year’s lame duck Congress, millions of federal retirees and survivors took cuts ranging from about $20 to more than $50 in their most recent annuity payments. The reason: Congress waited until too late to agree, and then vote, to extend the so-called Bush tax cuts which were due to expire this December 31, 2010. Although it did approve the extension in an 11th hour vote, it was too late for the IRS, which had to pre-program its computers based on the assumed new higher rate also in effect prior to the Bush tax cut.

      So what’s next? Tax expert Bob Leins discussed the situation yesterday on his radio show. He expects the next checks retirees get will be based on the 2010 tax rates and that the retirees will get a refund of whatever they lost this month.

      link

  17. Carol in Michigan says

    Totally caught off guard!! Our net pensions were reduced by over $79+ for the month of February and apparently this will be the case each month in the future!! This translates to over $951 less spending income per year for us. There was no notice this was going to happen!! In fact, lots of hoopla was made regarding continuing the Bush tax cuts!! No mention about the “Making Work Pay Tax Credit” expiring!! This is not fair for the elderly and retirees on a FIXED income; especially, with food, heating, and gas prices increasing!! This just confirms the growing resentment towards we people who played by the rules by doing without “extras” during our working years to plan for our retirements; i.e., pensions and social security.

  18. Jeff says

    Better vote Republican or Tea Party in 2012 or you are really going to see even higher tax increases in 2013. VP Biden even promised this was going to happen.

    • Randy says

      You’re absolutely right Jeff. We ain’t seen nothing yet. The big hikes are coming, either in the form of taxes or our cost of living, especially if the Dems get reelected.

      • JE says

        The Dems want tax increases for rich Americans, and the Tea Party and Republicans want tax cuts which means service cuts for the programs low- and middle-income people rely on. That is, public education, social safety nets, family planning…

        The Republicans prevented tax increases for the rich this year, and actually held the Democrats hostage by threatening to raise taxes for everyone. If they had allowed the increase for the rich to go through, our tax futures would be much more secure. Won’t be getting my vote.

  19. Barbara Higgins says

    I am so disgusted with this situation. I e-mailed my 3 Federal Representatives and the White House! That was after my husband called one of those Representatives at his Washington, D.C. number.

    We live in a state where we can collect a retirement plan, and Social Security. We feel fortunate about this, but by any means we are not even near wealthy. My husband’s take home pay on his pension check was reduced by $44.00 per month. His pension plan told him that is because
    they also rolled back to 2008 spending. I think that this was not an accurate answer.
    It does not do us any good to complain. That is why when I do not like something, I always contact my representatives and let them know what I am thinking! For only a few of us to to contact our representatives is not enough. We the people need to protest peacefully with online petitions and flood Washington with those signed petitions. For those of you that may not contact your representatives, it is so easy to do with a computer! I always enter their name in the search box, and click on their websites!
    The websites should have an e-mail link where you can voice your opinion. I always hear back from my representatives.

    In the meantime, I am going to check with a few of the progressive websites to see, by chance if they have started a petition concerning this matter.

    The middleclass in this nation need to stick up for themselves in a non-violent way, because no one else will ever stand up for us, We have to do it!!!
    This also applies for retirees as well. I hope others will join me in a peaceful online protest so that the middleclass and retirees are not left behind.

  20. Renee says

    I have seen a decrease in my check as well, but now that I understand where it is coming from, I’m a little more at ease. For those of you who think that the higher-income earners are getting off easy, this is not really the case. (I might also note that this has nothing to do with Republican policy, as the tax policies in effect right now are being inacted by the Democrat party.)

    Lower-income earners have seen the exact same increase in federal taxes as other higher-income individuals. Across the board we are all losing up to $400 per year in the “Making work Pay” credit.

    The difference is that the 2% decrease in social security taxes (given to every one who pays SS tax), is actually enough to offset the difference in higher-income paychecks (ex 2% of 100,000 is more than 2% of 20,000). In addition, people who are receiving Social Security paychecks or Teacher salaries, are likely to see an even bigger decrease in their paychecks, because they do not pay Social Security taxes. Therefore, if you don’t pay Social Security taxes like those in other fields of work, you are not getting the 2% decrease in SS taxes (there is nothing to offset the lapse of the “making work pay” credit).

    • JE says

      The difference is that $400 in your pocket for a low-income earner means a lot more. If most of your income goes to rent, utilities, and bills, even $30 month means a little extra emegency savings or spending money.

      For someone with even a little discretionary spending, that extra money doesn’t mean much, and it probably won’t improve the economy nearly as much.

  21. Renee says

    I, too, have seen a decrease in my paycheck due to an increase in Federal Income tax. So…I did some research in order to understand more completely what the increase is all about. Everyone around me has been noticing increases in their paychecks, so at first I was a little confused. While I don’t like having to pay more federal income taxes out of my already-too-small paycheck, I think that many people have a misconstrued idea that the more fortunate are “reaping all the benefits”.

    First, I must say: to those of you who think the higher-income earners are getting off easy, that is not really the case. Secondly, I’ll also mention, that this has nothing to do with Republican tax policy favoring the wealthy as the tax policies we are experiencing now are that of the Democrat party. Obama did extend the Bush tax cuts for two more years (thank God), but in two years, if they are not extended again, the average person will see around a $3000 increase in taxes.

    This year–across the board–all tax payers will see an increase in Federal taxes (due to the lapse of the “making work pay” credit). Everyone will basically see the same increase (up to $400 per year). Higher-income salaries have to pay this increase too.

    The difference is this–Social Security tax has decreased by 2%. Naturally, 2% of $100,000 is more than 2% of $20,000. Therefore, middle- and higher-income earners actually have seen enough of a decrease in Social Security taxes to offset the increase in Federal Income taxes.

    Furthermore, if I’m not mistaken, those who earn their salaries from Social Secuity, pensions, teacher salaries, etc. (I have many teachers in my family), do not usually pay Social Security Taxes. Therefore, these people would not see a decrease in Social Security Taxes (you can’t decrease what you don’t pay in taxes). So….their paycheck decrease due to income tax, is likely much more noticeable with no offset of SS Tax.

    This tax issue is not about the rich out-doing the poor….it’s simply straight across the board. In fact, if I’m not mistaken, the Bush tax cuts were not extended to the 2% wealthiest taxpayers. Middle to higher-income tax payers are already paying a higher percentage in taxes than lower-income tax payers. I know times are tough and taxes are high, but let’s not point fingers at “who the tables” are favoring. We don’t really know until we’ve experienced it from both sides of the fence.

  22. jeanne says

    I am retired. In January I was informed by letters that the taxes on my pensions would go up $54 more dollars a month. Also my health insurance would go up $12 more a month. I won’t be voting for democrats or republicans again. To me they are the same.

  23. Bob says

    I’m a retired federal employee. I do not understand why an extra $50 is being withheld for income taxes every month. Nothing I’ve read has explained my situation. The Making Work Pay Tax Credit has nothing to do with me.

    • says

      Could be the fact that some pension systems updated their software in anticipation of the federal tax rates going up. When the tax rates were instead extended, they were caught flat footed, and are now having to update their systems again. So some folks saw more tax taken out for January than should have been, but it should be fixed soon. Of course that may or may not apply to your situation.

  24. Steve says

    Totally insane!!!!!! Lets all punish low income , Our President in the worst economy in history is going against his promises . He also made a 20% punishment to Non- custodial parents who can’t pay now because of job loss so lets charge them more????? I hope anyone who reads this just don’t vote for any of them of any party. I think our President is a good speech maker and has a nice smile but is a phony in government. Thank you good ol USA

  25. barb says

    we had an increase in my husbands fed tax on his military and post office retirement. we get $63 less. and when he just did our taxes he has to pay twice what we paid last year. Because they took some thing away that we were able to claim last year. when will it end ?

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