April 15 is the annual deadline for filing your federal and Pennsylvania State Income Tax returns. Now is a great time to use these documents to assess your financial situation and plan for your 2011 income tax bill. If you received a refund, do you know why? Take some time to review your return.
Let's start with your adjusted gross income. Do you expect your income to increase or decrease compared to last year? One way to decrease your AGI is to contribute to an employer sponsored retirement plan or contribute to a traditional IRA. Self-employed individuals also have the opportunity to contribute to several other types of retirement plans that allow for tax avoidance today.
Next consider how many personal and dependent exemptions you will have. Each household member is worth $3,650 in exemptions. In other words for a family of four - $14,600
Also consider your filing status. Married filing joint and under age 65 is $11,400, if both are age 65 or over $13,600.
Children under the age of 17 are worth $1,000 in child tax credit. If your child will turn 17 in 2011, your income tax bill could be increased by this $1,000. Children who are enrolled in college and meet certain guideline can qualify their household to receive up to $2,500 in the American Opportunity Tax Credit, $1,000 of which is refundable. In order to receive this credit the household must claim the student as a dependent - which parents can do as long as the student is under age 24 and considered a full-time student for at least 5 months of the year.
Retirement savers credit - if you meet income guidelines, contributions to employer sponsored retirement plans, traditional IRA's and even Roth IRA's can be included in calculating this credit which reduces your tax bill.
Earned income tax credit - whether you work for someone else or for yourself - if you have earned income and meet income guidelines, you may be eligible for this tax credit, even if you don't owe any federal income taxes!
Your 2011 federal income tax bill may be up to $800 more than your 2010 bill due to the expiration of the "Making Work Pay" tax credit. This credit was calculated as 6.2% of your earnings up to a $400 limit per worker. While you won't see it on the 2011 tax return, somewhat in lieu of this credit a change was made to your federal social security tax withholding. Normally the employee share of contributions made to Social Security is 6.2% of wages up to a certain income limit. For tax year 2011 ONLY, this has been reduced to 4.2%. You may have noticed a slight increase in your paycheck at the beginning of the year. Remember, come January 1, 2012, your check will be reduced by 2% as your contribution to Social Security will increase from 4.2% to the usual 6.2%.
Finally, if your refund includes paycheck withholdings, consider making adjustments to your W-4 form filed with your employer. Completing that simple form confuses many workers and the IRS is trying to make it less so. www.irs.gov has a link to an online withholding calculator that will help you determine the correct income tax withholding for your situation. If you do decide to change your withholding to reduce the amount of taxes taken from each pay (stop paying taxes you don't owe!) also make plans for what you will do with this newfound money. These funds could be used to establish or increase your emergency fund, pay off credit card balances, pay off other types of debt or maybe even help fund a well-deserved vacation.
For more details on income taxation, check our extension website www.extension.psu.edu/income-tax.
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