My inbox continues to be chock full of questions about the Making Work Pay Credit for 2011. Taxpayers, it seems, are still confused about whether the credit was extended and how it relates to the payroll tax cuts. So let me see if I can set the record straight for you:
- The Making Work Pay Credit was not extended into 2011. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act which was signed into law on December 17, 2010, did not renew the credit. The credit ended in the calendar year 2010.
- If you qualified for the credit, you would have received it as part of your 2010 federal income tax return which was filed during the 2011 tax season.
- Since there was no Making Work Pay Credit in 2011, you will not report the credit when you file your 2011 federal income tax return during the 2012 tax season.
- If you did not receive the benefit of the Making Work Pay Credit in 2010, the last year the credit was available, you can amend your return. First, make sure that you qualified for the credit. Also check to make sure that the credit wasn’t already applied since the IRS was making an effort to apply the credit for qualifying taxpayers who did not complete a Schedule M. Keep in mind that you have three years from the date of filing your original return or two years from the date of paying the tax (whichever is earlier) to claim a refund.
- The Payroll Tax Holiday was in effect for 2011 and was intended to make up for the loss of the Making Work Pay Credit. If you’re an employee, you should have noticed a few extra dollars in your paycheck each pay period this year. That’s because, on the employee side, payroll tax contributions for federal purposes have been reduced by 2%: instead of paying in at 6.2% for Social Security taxes, contributions are 4.2% for Social Security taxes. Contributions for Medicare remained the same.
- If you are an employee subject to withholding, you will not receive an additional break on your federal income tax return as a result of the payroll tax cuts when you file in 2012. You’ve already received the benefit of the payroll tax holiday on an “as you go” basis since your employer should have adjusted your withholding for Social Security accordingly.
- If you are self-employed, you will receive the benefit of the payroll tax holiday when you file your federal income tax return in the form of an adjustment to your SE tax due. Your SE tax will be reduced by 2%; the SE tax rate of 12.4% is reduced to 10.4%.
- The payroll tax holiday has been extended for 2012 – but only for two months. Expect that to change.
- The “recapture” tax for taxpayers, that additional income tax for taxpayers who receive more than $18,350 in wages during the first two months of 2012, will not affect your 2011 taxes. The extra tax is payable in 2013 when you file your 2012 federal income tax return.
Hopefully, that makes sense.
And if you’re having problems sorting it out, don’t blame your tax pro, blame your Congressional rep. This is the kind of confusion that happens when Congress plays the “let’s get more votes” revolving door of credits and deductions. Consistency, folks. Is it too much to ask for?
