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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.

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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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