Smaller Refund May Not Mean Bigger Tax Bill

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eHow Money Blog

Brace yourself.

Despite the 2 percent reduction you got in your Social Security and Medicare taxes last year, your federal income tax refund is likely to be several hundred dollars lighter this year, all things remaining equal.

The reason: The Making Work Pay Tax Credit – a legacy of the 2008 economic stimulus bill – disappeared for the 2011 tax year. That means that the $400 credit you got in 2009 and 2010 if you are single and working – $800 if you’re married and both of you work – won’t be there when you file your 2011 tax return this spring.

That’s not to say that your tax bill has gone up.

In fact, most workers probably came out ahead with the tax changes that were made in 2011. That’s because the temporary 2 percent reduction in FICA taxes – the fees that fund the Social Security and Medicare trust funds – that was instituted last year amounted to more than the expired $400 credit if you made at least $20,001 as a single worker, and more than the $800 credit if you made more than $40,000 as a couple. It’s just that the FICA reduction was paid to you in the form of reduced deductions from your paycheck throughout the year, while the old credit used to come in the form of an increased refund or a reduced tax bill at tax filing time.

Thus the lighter refund this year, despite your (probably) reduced tax burden.

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