Next Year's Tax Refund May Be Lower

Congress did away with the Making Work Pay credit for 2011 tax year.  The Making Work Pay credit was a refundable credit with a maximum value of $400 ($800 for a joint return).  Basically the way it worked is the withholding tables were adjusted to reduce the amount of tax withheld during the early pay periods, once that threshold was reached the withholding return to the normal rate.  So in other words, you received more money in your paycheck during the first few paychecks and then the MWP credit offset the difference to avoid a tax hit at the end of the year.  The withholding tables have been returned to the previous version, so you no longer receive that little extra bit of cash in your paycheck. 

Although the tables were adjusted the changes are not exact and may not be suitable for each individuals tax circumstances.  Self employed individuals who pay estimated tax do not have an equivalent withholding adjustment.  Thus it is possible that the loss of this credit may adversely affect some taxpayers.

To offset the elimination of the credit Congress reduced the FICA withholding rate by 2 percent (6.2 percent to 4.2 percent and matched it with a reduction in the Self Employment tax.  This may affect the refund or balance due of those individuals that work for multiple employers and earn more than the maximum amount subject to FICA withholdings ($106,000 for 2011).  In those situations, the excess withholdings are refunded to the taxpayer on their tax return, therefore those individuals should expect to see a reduction of about 1/3.

As a side note, another change you may notice for 2011 is the format of the 1099 statement from your broker.  Up until now, the IRS has received an informational statement from the brokerage house stating the security, amount of the sale, quantity of shares sold and date of the transaction. 

The only way they were able to determine the taxpayer's basis (adjusted purchase price) was during an audit.  The informational statments now will have to included the client's adjusted basis in the security and whether any gain or loss was long term or short term.   Securities initially covered under this new requirement include: (a) shares of stock in a corporation, (b) notes, bonds, debentures, or other evidence of indebtedness and (c) commodities, contracts, or derivatives with respect to the commodities.  This new requirement is being phased in, so changes may not be noticed immediately.  In my opinion this will be a good thing.  I have encountered a couple of instances where the client did not give me the brokerage statement when I filed their taxes and they received a letter later adjusting their return and taxing them on the gross proceeds of the sales.  Once the basis was applied the tax liability went down or was eliminated.  The change in the statement won't eliminate the problem with the client not reporting the income, but it will make the IRS letter less overwhelming.

Please feel free to contact me with any questions related to any of the topics mentioned above.