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Exit Making Work Pay Credit, Enter Payroll Tax Holiday

September 24, 2012 By

Making Work Pay Credit that was available and applicable for the 2010 calendar and tax year, for tax returns that were filed in 2011 in no longer available for the 2011 and 2012 tax returns filers. This is after The Unemployment Insurance Reauthorization and Job Creation Act that was signed into law on December 17, 2010 failed to renew the Making Work Pay Credit.

However, the Payroll Tax Holiday, which was also in place in 2011, was introduced as a “replacement” tax break for the 2012 tax returns filers. Even though the Payroll Tax Holiday had been initially slated to expire in February 2012, it was extended to the end of the year. Under this plan, employees must have so far, realized some extra bucks on their paychecks each payday, and will remain so all through the year.

This has been the case due to the reduction of the payroll tax contributions for federal reasons by two percent for the employees. Social Security tax rate of 6.2% was slashed by 2% to 4.2%. However, the Payroll Tax Holiday did not affect the Medicare Contributions, as they remained intact. Also unaffected, is the cap for Social Security taxes (this cap is not available for Medicare tax.)

One significant difference between the Making Work Pay Credit and Payroll Tax Holiday lies in the requirements. While the former required taxpayers to file a Schedule M, the Payroll Tax Holiday has no such requirement; you don’t have to do anything. Any employee who receives the form W-2 is as good as having already enjoyed the credit’s benefit. More schedules or forms to fill are not requited in this case.

The case might be a bit different with self-employed individuals, as they have to do a little more work than their employed colleagues. The break is also applicable to self-employed taxpayers whose SE (Self-employed) tax is equally shed by two percent, the same way it was calculated on their 2011’s federal tax returns. The reduction has however, to be figured out by the individual, since it is calculated on Form 1040.

This might be a bit confusing, but Congress should shoulder the blame, as they are constantly terminating certain credits while drawing up new ones. It is obvious that these alterations cause taxpayers and even tax experts a lot of headache. It takes time and effort to figure out how most of the new tax breaks work, but it will be worth it when you are properly filing your taxes and either enjoying extra tax savings or avoiding an IRS audit.

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A Guide through the Latest Tax Changes

May 14, 2012 By

If you have filed for an extension, you have more time to learn about the tax updates for the 2011 year. Here is a list of what is new for the 2011 tax regulations:

  1. Schedule M and Making Work Pay Credit are no longer there – These were available in 2009 and 2010 but are not available in 2011 since there is no Schedule M to file and no additional credit for the year.
  2. Payroll tax cut for employees – employees who receive form W-2 enjoyed a tax break of 2% on FICA contributions during the year. Contributions from Social Security taxes were 4.2% instead of 6.2%. Medicare contributions did not change. Presently, there is no need to fill forms, or schedules, since the break is automatic and will not affect your 2011 federal income tax return since it is tied to Social Security payroll taxes. Taxpayers who did not pay Social Security system during the year will not receive any benefit.
  3. Payroll tax cut equivalent for self-employed taxpayers – for the self-employed, you will receive the benefit of the payroll tax cut when you file your federal income tax return in the form of an adjustment to your self-employment (SE) tax due. The SE tax rate reduces from 12.4% to 10.4%.
  4. Federal 1099-K – this is the new form called Merchant Card and Third Party Network Payments making a debut in 2011. This is for taxpayers who have a credit card merchant account, PayPal account or similar account and otherwise meet the criteria.
  5. Visible Health Care benefits on form W-2 – Companies with more than 20 employees must indicate the value of health care benefits they pay on the behalf of employees on the form W-2 in 2012. Do not panic if this amount shows on Box 12, using code DD. It has no effect on your taxable income.
  6. Unchanged deductions – The Standard Deduction rates for 2012 have not changed from 2011. The rates are $5,800 for single taxpayers or those married but filing separately, $11,600 for married taxpayers, and $8,500 for taxpayers filing as head of a household. The additional standard rates allowed for senior citizens and taxpayers who are blind are $1,150 for married taxpayers filing jointly and $1,450 for single taxpayers.
  7. Small change in Personal exemptions – This has increased from $3,650 to $3,700 in 2011.
  8. Brokers report cost basis for certain stocks on 1099-B – The form 1099-B has new boxes indicating when you bought a stock, cost or basis, long-term or short-term gain or loss, or if the sale was a wash sale.
  9. Alternative Minimum Tax – There is no reform for AMT. It is unadjusted for inflation
  10. Report of Foreign Bank and Financial Accounts (FBAR) – IRS has made FBAR reporting a compliance issue. You need to check the applicable box on Schedule B when you send in your return.

This is a brief summary of the changes worth noting in the 2011 tax year. For more information, it would be advisable to approach a tax professional.

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Changes that Might Affect Your Tax Status for 2011

April 23, 2012 By

The tax season for 2011 is over but you have up to October 15, 2012 to file your tax return for the 2011 tax year if you filed for an extension. In case your tax return is not filed yet, here is your opportunity to catch up on the new developments for the 2011 tax season:

  1. There is no Making Work Pay Credit available for taxpayers in 2011, as it was in 2009 and 2010, meaning you do not have a Schedule M to file or an additional credit for 2011.
  2. There is a payroll tax break of 2% for employees. Therefore, those who receive W-2 forms pay FICA contributions of 4.2% for Social Security taxes down from 6.2% for 2011 and 2012. Furthermore, the same payroll tax cut is available for self-employed taxpayers who will receive the benefit once they file their federal income tax return in a form of an adjustment of the Self-Employment (SE) tax due. Therefore, if you are self-employed, your SE tax will be 10.4%, lower from 12.4%.
  3. There is a new form to fill now, the federal form 1099-K, also known as the “Merchant Card and Third Party Network Payments”. All taxpayers with credit card merchant accounts, or Paypal, or any account of the like and still meet the requirements; will receive this form from the relevant service provider.
  4. Your healthcare benefits may appear on your W-2 form so do not panic when you see it. Employers with over 250 employees on payroll are required to quote the amount of health care benefits they pay for every employee on the W-2 forms starting 2012, though some are already doing it for 2011. You can view the value of your health benefits in Box 12, code DD and rest assured it does not alter your taxable income.
  5. Be ready to pay slightly more for personal exemptions as it is $3,700 for 2011 higher than $3,650 for 2010.
  6. There are now more details concerning certain stocks bought or exchanged on your 1099-B. The form has new boxes now for the date of stock purchase, the coat or basis and whether you had a short or long term gain or loss, among other details.
  7. The year 2011 has seen a slight boost in the AMT exemption to $74,450, $48,450 and $37,225 for taxpayers filling jointly, single taxpayers alongside head of households, and married couples respectively.

If you have any more questions, you may have to check with your tax professional.

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Tax Relief or Burden? The Pros and Cons of Stimulus Packages

June 23, 2011 By

Every time a recession looms or the economy starts to slow down, the government seeks to restore the economy through different stimulus plans. The recession of 2008 was one such case. When the mortgage crunch hit the economy, causing widespread panic with the sudden financial plunge, the government took immediate measure to stimulate the economy back to norm and to restore confidence in the economic market. President Bush signed the Economic Stimulus Act of 2008 that awarded low and middle income earning taxpayers with a stimulus rebate check of $300.00 for qualifying children and $600.00 for adults. Any qualifying taxpayer who did not receive the stimulus check was allowed to offset the stimulus amount against any outstanding tax liabilities.

The intent of the stimulus check was to induce spending into the economy in a hope of reviving it. Since the low and middle class income earners were expected to spend such funds received on goods and services, economists projected that they were the best bet to jump start a stalled economy. Increased spending would mean increase in demand, which would bring growth to manufacturing and create jobs by extension. However, the expected impact of the stimulus checks did not result in significant economic growth but instead, produced a $165.9 billion government deficit.

There were mixed reactions and proposals as to how to resolve the new crisis that had been created (the problem of the resulting deficit). The economy was slowing down again and the government had to take action again and fast. Ben Bernanke, the Chairman of the Federal Reserve advised that a second stimulus plan could be appropriate to keep the economy in momentum. However, lawmakers were divided on the stimulus plan with others suggested tax cuts instead.

Eventually, there was no second stimulus check in 2008, as anticipated by many. When the Obama Administration took over the White House, they set out various stimulus programs under the American Recovery and Reinvestment Act (ARRA) of 2009. Under the stimulus package, the recipients of the stimulus checks were retired citizens and disabled persons, who received $250.00. Besides the rebate checks to these qualifying group of people, the ARRA opted for tax breaks for the rest of the taxpayers. The Making Work Pay Tax Credit was extended to low and middle income earners, which provided some tax relief. Qualifying individuals received a credit of $400.00 and married couples that filed jointly received a credit of $800.00. The credit that was set to last through 2009 and 2010 lapsed and was replaced by the 2010 Payroll Tax Credit.

Under the Payroll Tax Credit, Social Security tax was reduced from 6.2% to 4.2% with a cap of $106,800.00. Besides the introduction of the Payroll Tax Credit, Congress decided to extend the Bush tax cuts that were set to lapse in 2010 for two more years (until 2012).

However, in May 2011, a report on jobs and unemployment showed that economic progress was not approaching as expected. Recent reports also indicate that the manufacturing sector is declining and the May 2011 Federal Reserve Report also gives discouraging numbers. There are high expectations for the government to come up with extra stimulus packages, including another stimulus check distribution plan, to try and revive the economy further. However, the anticipation of a stimulus package is now challenged by the government deficit. For now, economists, tax experts, and the public at large can only wait and see what remedy the government will put in place to try and resolve the situation.

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The Making Work Pay Credit and Your IRS Debt

May 13, 2011 By

Most people saw the effects of the Making Work Pay tax credit in their paychecks in 2010. The credit was designed to reduce federal withholding so that people had more cash during the year. Single taxpayers brought home up to $400, while married taxpayers brought home up to $800.

However, even if you got the full credit already, you will still feel the effects of it when you file your income tax return this year and calculate your taxes. You do not have to pay it back, but you do have to claim it on Schedule M and use a long Form 1040 or 1040A. Taxpayers who are able to use Form 1040EZ can claim the credit on the back. These calculations are worth the extra effort, though, because they may prove that you are due more money if you have not already received the full benefit of the credit. When you file, the credit is added as if it were additional withholding that you added to your paychecks and may increase your return amount or at least reduce your IRS debt.

Some people will not be able to claim some or all of the credit. Retirees do not have to include it. Nonresident alien workers and those who can be claimed as dependents are not eligible for the credit. High income taxpayers may have some issues when filing because the credit amount changes. Joint filers whose modified adjusted gross income (MAGI) is between $150,000 and $190,000 and single filers whose MAGI is between $75,000 and $95,000 will not receive the full credit. Those with income higher than the maximum amounts receive none of the credit. When taxpayers fill out Schedule M, it will be clear how much or how little of the credit applies.

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Who Benefits from the IRS Payroll Tax Holiday?

March 24, 2011 By

For 2011, the checks that are issued for tax return processing may be a little larger than usual. If that is the case when you receive yours, it is not in error. There is a new benefit called Payroll Tax Holiday. This is a one-time tax break that was issued by “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” Payroll taxes will still be incurred; they will just be set at a lower rate for this tax season than normal.

Employer IRS payroll tax contributions on the federal level will not change and will maintain the 6.2% rate. On the other hand, employees will benefit from a reprieve. The contributions due by employees will be reduced 2%. That is, whereas the normal 6.2% Social Security contribution would apply on income levels up to $106,000, these individuals will only be subject to a 4.2% Social Security taxation. Keep in mind that Medicare contributions, which are not subject to a wage cap, will not be affected by the Payroll Tax Holiday.

This is beneficial to those in the middle and upper income level taxpayers. Those who earn $50,000 would be eligible to the 2% savings of $1,000. A jointly filed married couple earning $100,000 would receive their 2% savings of $2,000.

However, lower income taxpayers do not reap the benefits since the Payroll Tax Holiday was implemented in lieu of the Making Work Pay Credit. Because this credit was a fixed $400 for taxpayers filing separately and $800 for couple that are married, the full credit was given to lower income taxpayers regardless of whether they earned even very small amounts. Since the Payroll Tax Holiday works via a percentage, the resulting check is naturally lower for families whose income is lower.

Individuals who are self employed experience a break as well, by way of the Payroll Tax Holiday. Whereas they would normally be required to pay 12.4% in self-employment tax, they will only have to relinquish 10.4% of their earnings for Fiscal Year of 2010.

Clearly, the Payroll Tax Holiday is a nice benefit for most every taxpayer—although, alas, it is only temporary.

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Make Sure to Make Work Pay with Your 2011 IRS Tax Return

March 23, 2011 By

Many taxpayers are eligible for the Making Work Pay tax credit on their 2010 tax returns. This credit is based on your earned income for 2010. When filing your taxes, it is important to consider several factors to be sure that you receive the total portion of the credit for which you are eligible.

The credit is available for up to $400 for individual taxpayers, and up to $800 for taxpayers who are married filing jointly. This IRS tax credit is refundable. Many workers have already seen the benefit of the Making Work Pay tax credit in their paychecks, which is reflected in lower federal employee tax withholdings.

Taxpayers whose adjusted gross income in 2010 was over $95,000 as an individual or $190,000 married filing jointly are not eligible for the credit. Furthermore, taxpayers who can be claimed on someone else’s return as a dependent cannot claim the credit. Also, taxpayers who are nonresident aliens or do not have a social security number cannot claim the credit.

How you file for the Making Work Pay tax credit depends on which form you file for your federal income tax return. If you file a 1040 or 1040A, you will claim the credit on Schedule M. By using Schedule M, you will be able to determine whether you have already received the full benefit of the credit through the abovementioned deductions of federal withholdings from your paycheck. If not, you may be due the full amount or a portion of the amount.

If you file using 1040-EZ, use Line 8 which is on the back of the form. You will also be able to determine whether you have already received the full benefit of the credit through lowered federal deductions on your paychecks and to figure the remaining amount due. It may be beneficial to get tax help to correctly claim the credit.

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The Tax Relief Act: Can it Affect your Withholdings?

March 9, 2011 By

Enacted on December 17, 2010, the Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010 included several changes that affect many taxpayers for 2011 IRS filing. This includes the worker’s take home net pay and retirees’ pension checks. The Tax Relief Act extended the income tax rates that were supposed to end last year in 2010, which had prevented a large increase in income tax withholdings. Unfortunately, this extension did not save the Making Work Pay Credit as this credit will only pertain to this year. Pension recipients were not included in the MWP credit unless they worked part time and had a taxable income.

Due to the Tax Relief Act which made income tax rates lower than before, taxpayers will see an increase in their net pay (take-home pay amount) on each of their checks earned.

However, the same does not apply for pension checks. Once the pension plan administrators implement the new changes for 2011, pension retirees will see a decrease in their pension checks by as much as $7-$50 per pension pay check. Unfortunately, this hurts the retiree but the option to change withholding can deflect some of this. Check into what changes the withholding can affect for you.

Without the Making Work Pay Credit, we, the working people, are not benefiting from these new changes. Nevertheless, there are still other changes out there that were made to enable more tax relief; it is a matter of balance and checking out all options for each taxpayer as each taxpayer is different than others. The IRS encourages all taxpayers to review withholdings information every year with the use of a withholding calculator that is available on the www.irs.gov. If any necessary changes are needed, use the W-4 form to make adjustments to withholding to help along the way for taxes.

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Make Work Pay When You File Your 2010 IRS Tax Return

February 28, 2011 By

The Making Work Pay credit is still available for your 2010 tax return, even though you may currently be seeing the benefit of the payroll tax holiday. The Making Work Pay credit is easy to forget in light of the press coverage of the 2011 payroll tax holiday. The payroll tax holiday applies to your paycheck in 2011, while the Making Work Pay tax credit applies to your 2010 federal income tax return, which you are to file this year. Keep in mind that the deadline for filing is April 18, 2011.

The credit was created to benefit working and middle class taxpayers, which means it phases out as taxpayers’ income gets higher. The credit is primarily an incentive to work and taxpayers must have earned income to qualify. This means that qualifying taxpayers must have wages from work, not just income from other sources, to receive the Making Work Pay tax credit.

The Making Work Pay tax credit is a flat credit of up to $400 for individual taxpayers and $800 for those married filing jointly. Self employed persons are also eligible. The credit is also refundable, which may mean you get a few extra bucks on your tax return this year!

Remember that even if you currently see evidence of the payroll tax holiday, the Making Work Pay credit is still available for you on your 2010 tax return. The credit is usually figured on Schedule M. You can also find more details on the IRS website at http://www.IRS.gov, or you can talk to a tax specialist to see if it applies to you.

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Great Tips on Credits and Deductions to Help Tax Filers

February 7, 2011 By

Many people who file taxes find that filing can be tricky. Although April is months away, it can approach with great speed and before anyone knows it, April descends upon us! There are many great tips to help tax filers to make filing easier and less time consuming.

Making Work Pay Credit – This is a credit that can be used only this year for filing as it expired this past December 2010 when some of the taxes were updated, changed, or amended. Make sure you use this credit as it lowers the amount of taxes paid in to the IRS and can end up giving positive result towards a refund.

Deductions – There are many deductions that many taxpayers are either unaware of or don’t realize that they can take. These are some lesser known deductions (if the deductions apply to you) that you should not overlook: moving expenses, charity donations, Disaster Relief deductions, elderly or disabled deductions, and college expenses. There are even more deductions that can be taken if the taxpayer has the right information and knowledge; take advantage of these deductions by taking the time to do a little bit of research! Check the IRS website for the newest tax changes and lists of credits and deductions that may apply to you at:

http://www.irs.gov/faqs/faq/0,,id=199544,00.html

First Time Home-buyer Credit – For those who bought a house for the first time and closed between April 30, 2010 and June 30, 2010, you can claim the first time home-buyer credit. This credit is only available to claim for the 2010 year tax return as this is also another credit that has expired December 2010 and is only applicable for up to April 18th 2011.

There are other credits and deductions that can apply regarding your home, such as home energy expenses that incurred when remodeling a home to an energy-efficient home (the maximum amount of this credit is $1,500.00).

Take advantage of all the help tax filing can offer, as this is the last time for some credits and deductions that are applicable for taxpayers!

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