Why Your Paycheck Is 2% Bigger This Year

After the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Act) late last year, there were certain changes that will impact your take-home pay in 2011, versus what you were seeing in 2010.

For starters, although the 2010 Tax Act extended the tax rates to be the same as they were in 2010, as always there are increases in the tax tables which have a minor impact on your take-home pay.  Typically, this change will increase your tax withheld, reducing your take-home pay.

The 2010 Tax Act also included a provision to reduce the withholding requirement for Social Security from 6.2% to 4.2%, which will have the effect of increasing your take-home pay by 2%.

One other change to your paycheck came about because of a provision that was not included to be extended as a part of the 2010 Tax Act – the Making Work Pay credit, which provided a $400 credit for most all wage earners.  This will have the effect of reducing your take-home pay.

Another item that may have impacted your take-home pay for 2011 is the Advance Earned Income Credit payment.  In the past (through the end of 2010), you could request and receive a portion of the Earned Income Credit with each paycheck instead of waiting until you file your tax return.  This provision was eliminated at the end of 2010.

Lastly, if you happen to live in one of the states that has increased the state income tax for individuals – say, for example, Illinois, where I live.  In Illinois, your state income tax withholding has increased from 3% to 5%, taking away another 2% of your income in withholding.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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