If you read my blog post last week, you noticed I mentioned the 2% social security tax reduction for tax year 2011. While this is certainly a nice pay raise, we need to make certain we don’t forget about the expiration of the Making Work Pay Credit. The Making Work Pay Credit benefited most earners with a $400 credit ($800 for a couple). The credit was not renewed for tax year 2011, so; therefore, we can’t forget to include its expiration in our 2011 tax planning.
While it’s certainly confusing and difficult to keep up with the stimulus de jour, it’s imperative to plan accordingly. For many couples, the expiration of the Making Work Pay Credit will impact the taxable bottom line for 2011 by $800. This should be addressed through tax planning and adjustments should be made to cover the shortfall….if necessary.
The 2011 social security tax reduction (your two percent raise) is nice, but we must remember the reduction shouldn’t impact your federal withholding rate (at least not much). If you are thinking of ways to spend your two percent raise (especially if they weren’t on my approved list last week), I would suggest to plan accordingly.
If anything, all this confusion illustrates the importance of tax planning. On one hand, it seems simple…..a 2% pay raise. On the other hand, it’s doesn’t…..a loss of an $800 tax credit for many filers. So, what should you do? The answer is simple: plan!