I’m doing my taxes for the year and I’m stunned that the Making Work Pay Credit and the offset for state and local taxes are gone this year. That costs even the poorest worker over a thousand dollars per year.
I’m not sure my position on it as it seems to be basically welfare, but with all of the attention given to the 2% payroll tax, what if any debate was there about the elimination of this tax credit?
I put this in GD so we can feel free to blame/congratulate who we would like…
The Making Work Pay Tax Credit was immediately replaced by the 2% payroll (Social Security) tax cut. Anyone making more than $20,000 saved more with payroll tax cut than they did with the Making Work Pay Credit. The two never existed at the same time. So it was a very non-controversial change. I guess, if you were working at a job that was not covered by Social Security you were screwed.
I’m not sure what you mean by the “offset for state and local taxes.” Do you mean sales taxes or income taxes? The deduction has always been for one or the other (not both), and it is still there, see line 5 on Schedule A. The deductions for state and local property taxes are on lines 6 and 7.
In any case, low income workers are less likely than others to itemize deductions.
I’m confused too. The MWP credit was only $400/$800, and I’d like to see a link for the tax offset.
You are right about the tax offset. I was looking in the wrong place.
But it seems to me that a married couple making less that $40,000 did better with the MWP tax credit ($800 flat) than they would with the payroll tax cut. Plus the MWP gives you a nice $800 at once where you can make a somewhat sizeable purchase instead of approximately $16 per week (assuming a 40,000 salary) that just becomes the “new normal” and doesn’t seem to help any.
You might like to give the government an interest-free loan, but I’d rather have my money now, thanks. I don’t think our tax policy should be based on the assumption that people are too stupid to put money into savings. Then again, it seems most people are too stupid to do that, given the glee we see around tax time from idiots getting multi thousand dollar refunds (and who prefer it that way).
The withholding tables were modified in 2009 and 2010 to reduce withholding to compensate for the MWP credit. So, in effect, people were getting it doled out weekly. When the credit expired, the withholding tables were again adjusted back up to where they were before.
In fact, this led to a lot of confusion where groups of workers had to pay back a significant sum (or have their refunds reduced) when they filed their tax returns: people who could be claimed as dependents, people who had two jobs, people who had withholding from their pensions (pensions use the same withholding tables as employment, but pension income did not count for the MWP credit), people whose AGI was over the maximum to claim the MWP, etc.
People who earned less than $20,000 and people whose jobs are not covered by Social Security did lose out. People who could be claimed as dependents (they were not eligible for MWP) and people whose AGI was over $95,000 (remember that AGI includes income from all sources, not just wages) were not eligible for the MWP credit, so they came out ahead with the payroll tax cut.
So let’s say a moron has his withholding set so that he gets an $1,800 refund at the end of the year. Do you know how much interest that stupid idiot dummkopf will have lost by letting the government have an “interest free loan” as compared to putting the funds in a savings account?
If the savings account offers the interest that’s currently listed on the Bank of America website, the opportunity cost for that stupid guy amounts to one printed issue of the New York Times for the whole tax year. Not the Sunday edition, of course, that costs more.
There is no benefit to trying to under-run your taxes these days. If someone wants a windfall at tax time, there is essentially zero penalty to them doing it.
But what if said guy used the extra money in his paycheck each week to pay down his 23% interest credit card balance? (I know, he should find a credit card with a 0% introductory APR on balance transfers instead. But maybe his credit isn’t all that good.)
And if you shop around internet banks, you can easily get at least 19 times the interest rate on an ordinary savings account than you would get at B of A. Still, that’s only 0.95%, but better than 0.05%. Probably enough to buy a cup of Starbucks.
If your savings and investment plan primarily involves a savings account, you’re already screwed.
Or what if he’s a recovering crack addict who maintains his sobriety until he gets that $1,800 tax refund, then he goes on a bender and his life falls apart! Oh, noes, if only he had adjusted his withholding!
Look, the idea that someone is dumb to like to have a refund at the end of the year is so often repeated but so little examined. If someone takes one vacation every year, and feels like getting a bigger tax refund is the best way to get the money for it, then calling him “stupid” or thinking him fiscally irresponsible for losing out on $1.50 to $6 in interest income is a really arrogant and unfounded accusation.
Obviously, nobody would say that the average Joe should shoot for, say, a $5,000 refund every year, that would be silly. I also wouldn’t advocate someone using a tax refund for a Las Vegas gambling vacation if that person is also drowning in debt. But getting on one’s high horse over someone mentioning an $800 refund? Totally laughable.
I am responding to what you said, and I quote, “I don’t think our tax policy should be based on the assumption that people are too stupid to put money into savings.” I then used the extraordinary leap of logic that putting money into savings means putting money into a savings account. Silly me!
Silly indeed. He could put the money anywhere. If he put the money in his checking account at our credit union, he would have avoided the minimum balance fees from May to October, or $40 altogether.
We are not talking about a lot of money here, and that is because we are not talking about a lot of money. If we are going to quibble about the timing of $1800 over a year, then of course $5/$15/$40 is real money.
He could also take the advice to invest money too literally, and makes monthly stock purchases on eTrade and racks up $50 in commission fees during those same months. If we want to invent scenarios to prove fictional situations correct, we can do this all day long!
There is no single answer as to what every person should do with respect to their withholding. All other things being equal, the difference between saving the money each month versus getting it all at once in a refund is currently almost nothing. If you want to add additional assumptions to the equation, things may change. If someone doesn’t follow the financial guidance that works best for you, they are not necessarily irresponsible or stupid. It means they are not you.
By the way, your credit union sucks if it charges minimum balance fees. Who runs it, BoA?
I don’t get it. How could it be “doled out weekly” and an $800 refund at the end of the year? It was both?
Why is nobody demagogue-ing this? Where are the “Obama raised taxes on the poorest Americans making less than $20k/yr” accusations from GOP candidates?
Less was withheld from each paycheck, and the total amount due in April was decreased. Most people didn’t suddenly end with refunds that were $400/800 greater or bills that were similarly lower than what they had the previous year.
For instance, let’s say I’m single and qualified for the full $400. Let’s say I get paid once a month, and they usually withhold $200 in federal income taxes. In April, my return shows that I should have only paid $2200, so I get a check for $200.
With the MWP tax credit in place, they adjusted the withholding tables so that they only took out $170 from each of of my paychecks. In April, my return shows that I should have paid $1800, so I get a check for $240. I paid $400 less in taxes, but I did not get that all in April. If I’m the sort of person who spends all my money, I have been stimulating the economy for the entire year rather than at the end of it.
I don’t know the details, but I suspect that the SS credit covered more people than the MWP credit. I think another poster may have already explained that. I don’t know if you got a MWP credit if you paid no federal income tax; there are lots of folks who don’t but still have earned income and still pay SS tax.
Let’s use some entirely fake, made up numbers.
Assume tax rates (except for the MWP credit) stayed the same in 2008 and 2009 and everything else stayed the same between the two years.
I will use the $400 per taxpayer number, not the $800 per married couple figure.
If we round off to 50 weeks, that’s $8 a week.
In 2008, let’s say they withheld $100 a week in income taxes from your pay. (And to make it easy, let’s say you worked 50 weeks, not 52 weeks.) At the end of the year, they have withheld $5000 in taxes. You fill out your Form 1040 and discover you only owed $4000 in taxes. You get a $1000 refund.
In 2009, they adjusted the withholding tables. Based on the same salary and the same W-4, they only withheld $92 a week from you. At the end of the year, they have withheld $4600. You fill out your Form 1040 and you discover that since you earned the same amount as last year, you owe $4000 in taxes. But you get to take the $400 MWP credit this year, that that reduces the amount that you owe for 2009 to $3600. So you get a $1000 refund ($4600 - $3600) just like last year.
Withholding is an inexact science because a lot of people don’t get the same exact amount every week or work every week, so it may not have worked out exactly even for everybody.
Now, let’s say you worked two jobs and they withheld $50 a week from each job during 2008. At the end of the year, you have paid $5000 in taxes again. You fill out Form 1040 and discover that you owed $4000. You get a $1000 refund.
Then in 2009, they make the changes to the withholding and withhold only $42 a week from each job. At the end of the year, you have paid $4200. You fill out your Form 1040 and again discover that your tax is $4000 and then you subtract the $400 MWP credit from that for a net tax of $3600. But this year you would only get a $600 refund ($4200 - $3600).
If your withholding was less than $8 a week, then yes, you would have had to wait until the end of the year to collect your full $400. But for most workers, it was passed out in $8 a week chunks.
Sorry, Ruken. You type faster than I do!
And the MWP credit was refundable, so it was possible to get back more than you had withheld.
My understanding of the rationale behind rescinding the credit while decreasing SS withholding was that Obama et.al. wanted people to put the money into the economy immediately, instead of splurging once a year. It’s better for “job creation” when people’s spending is more predictable. Money is money, whether you get $800 once a year or $15 a week.