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social security tax

Congress averts tax portion of fiscal cliff

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The “American Taxpayer Relief Act of 2012” approved by Congress just after we plunged over the “fiscal cliff” restores and modifies several expired tax breaks, but doesn’t address other issues. Here are the highlights of the new law’s provisions for individual taxpayers.

* Individual income taxes. Only the wealthiest taxpayers face an income tax increase in 2013. A new individual tax rate of 39.6% will apply to single filers with income above $400,000 and joint filers with income above $450,000. Otherwise, the 2012 tax rate structure is permanently extended. However, beginning in 2013, a new 3.8% Medicare surtax authorized by the 2010 health care law also applies to certain high-income investors.

* Capital gains and dividends. Under prior law, the maximum tax rate for net long-term capital gains would have been boosted to 20%, while qualified dividends were scheduled to be taxed at ordinary income rates, beginning in 2013. The new law extends the favorable 15% tax rate for most taxpayers and extends the zero tax rate for those in the 10% and 15% brackets for ordinary income. However, for single filers with income above $400,000 and joint filers with income above $450,000, the maximum tax rate on long-term gains and qualified dividends increases to 20%.

* Alternative minimum tax. Retroactive to January 1, 2012, the new tax law permanently revamps the alternative minimum tax (AMT) to avoid increased exposure to this “stealth tax.” Without the latest fix, an estimated 30 million more filers would have been required to pay the AMT for the 2012 tax year.

* Payroll tax holiday. The 2% reduction in payroll taxes ends. Employees will pay a 6.2% social security tax instead of the 2012 rate of 4.2%. Similarly, the social security tax rate for self-employed individuals reverts to 12.4% from 10.4%.

* Itemized deductions and personal exemptions. Restrictions are imposed on high-income taxpayers with income above a specified threshold. For single filers with adjusted gross income (AGI) above $250,000 and joint filers with income above $300,000, certain itemized deductions are reduced by 3% above the threshold, but the overall reduction can’t exceed 80%. Personal exemptions are phased out above the same AGI thresholds without the 80% cap.

* Tax extensions. The new law generally extends, for varying time periods and with certain modifications, several favorable provisions that had expired. The list includes the child, dependent care, adoption, and earned income credits; tax relief from the “marriage penalty”; the American Opportunity Tax Credit for higher education expenses; the deduction for tuition and related fees; the optional state sales tax deduction; the enhanced deduction for student loan interest; the $250 deduction for an educator’s classroom expenses; energy credits for qualified home improvements; a conservation donation tax benefit; and the tax-free IRA-to-charity contribution of assets up to $100,000 for taxpayers age 70½ and older.

* Estate and gift taxes. The new law avoids drastic changes for several provisions that had officially ended after 2012. Significantly, the estate tax exemption, which had been scheduled to drop to $1 million from $5 million (inflation-indexed to $5.12 million in 2012) remains at $5 million with inflation indexing. Portability of exemptions between spouses is preserved. The top estate tax rate, which had been scheduled to increase from 35% to 55% in 2013, is bumped up to 40%. The estate and gift tax changes are permanent.

* Business provisions. The new law also temporarily preserves several tax breaks for businesses — including the research credit, the enhanced work opportunity tax credit, a higher Section 179 deduction, 50% bonus depreciation and faster write-offs for qualified leasehold improvements — as well as extending unemployment benefits and higher payments to Medicare providers.

This latest tax law is not likely to be the final word on taxes in 2013. Congress is once again talking about a complete revision of the tax code. Also, the spending side of the “fiscal cliff” issue is yet to be dealt with. Stay tuned for ongoing changes that could affect your personal and business tax planning.

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Payroll tax cut is extended through 2012

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Congress passed an extension of the 2% payroll tax cut that had been scheduled to expire at the end of February. The extension means 160 million working Americans will continue to pay social security tax on their wages at a 4.2% rate for the rest of 2012, rather than at a 6.2% rate.

Because Republicans and Democrats were unable to agree on how to pay for the extended tax cut, the law included no spending cuts to offset the estimated $93 billion cost of this provision.

The law also provides for long-term federal unemployment benefits, setting the maximum at 73 weeks in states with the worst unemployment and 63 weeks for other states.

Another provision in the law includes the so-called “doc fix” that prevents a scheduled 27% reduction in Medicare payments to doctors.

The unemployment benefits and doctor payments will be paid for by government sales of broadband spectrum, requiring federal workers hired after this year to contribute more to their pensions, and cuts in certain health programs.

President Obama signed the bill into law on February 22.

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Meetings underway on payroll tax cut extension

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Last December, the 4.2% social security tax rate that workers pay on wages was extended through February 29, 2012.

 Now a Congressional conference is being held to find a way to extend the lower tax rate through the end of 2012. The sticking point is lack of agreement between Republicans and Democrats on how to pay for the extension, estimated to cost $100 billion.

 House Democrats have expressed the hope that the conference will be completed by the Presidents’ Day recess scheduled for the week of February 20. The legislation would extend the current 4.2% payroll tax rate through December 31, extend unemployment insurance benefits, and prevent cuts in reimbursements to Medicare providers.

 Several legislators want to include tax extenders in the payroll tax cut legislation. These “extenders” include such provisions as the research and development credit for businesses, the optional deduction for state and local sales taxes, and the $250 deduction for school supplies purchased by teachers. Though these tax breaks appear to be universally popular, finding a way to pay for them remains the big issue.

 As you do your 2012 tax planning, keep the uncertain legislative picture in mind.

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New law includes a payroll tax cut

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There’s a new tax break this year, and you’ll want to update your budget to accommodate it. The compromise tax legislation passed in December included a payroll tax cut for 2011.

* How it works when you’re an employee: Your employer will deduct less social security tax from your wages during 2011. Prior to the change, your employer was required to withhold social security tax from your paycheck at a rate of 6.2% of the first $106,800 of your wages. That rate was reduced to 4.2% for 2011, meaning your take-home pay will go up – with no impact on your eventual social security benefits and no payback required.

The Medicare tax rate remains unchanged at 1.45%, which your employer will continue to deduct from your check.

* How it works when you’re self-employed: You’ll pay less self-employment tax. In the past, you calculated self-employment tax using a 12.4% rate for the social security portion. For 2011, the rate you’ll use is 10.4%. Your income tax deduction – that is, the amount of self-employment tax you subtract from ordinary income – will not be affected.

* How it works when you’re an employer: The reduced rate only applies to the social security tax you deduct from employee wages in 2011. To calculate your expense, you’ll continue to use the 6.2% rate for social security tax, plus Medicare tax of 1.45%, for a total of 7.65%.

You have until January 31 to implement the change, and until March 31 to refund any overwithheld social security tax to employees.

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