On February 17, 2012, Congress approved the Middle Class Tax Relief and Job Creation Act of 2012, extending the 2 percentage point cut on individual payroll taxes through the end of 2012. President Obama is expected to sign the Act as soon as it reaches the White House.
The new Act keeps the individual share of Social Security tax at 4.2% (a 2% reduction from the 6.2% rate) for all wages subject to Social Security in 2012 and reduces the self-employment tax rate from 15.3% to 13.3%. Extending the 2 percentage point cut in Social Security payroll tax would save around $80 monthly for someone earning $50,000 a year and provide a maximum cut of $2,200 to high-end wage earners.
The 2% reduction was first enacted in 2011, but negotiations to extend it through 2012 stalled. In late December, lawmakers agreed to extend the tax cut only through February. The original December bill included a recapture provision, which is now waived upon approval of the Act.
The reduced Social Security (OASDI) withholding has no effect on an individual's future Social Security benefits. The cost of the payroll tax cut is not offset by other provisions and will be funded through transfers from the general fund of the Treasury to the OASDI trust fund. This is expected to increase the federal deficit by approximately $89 billion over the coming decade.
To the disappointment of many lawmakers, The Middle Class Tax Relief and Job Creation Act does not include tax revenue raisers or extensions of numerous popular expired tax provisions. The failure to extend these tax provisions increases the chances that lawmakers will likely try to extend them retroactively later this year. The following are a few of the popular provisions which may be revisited:
- 100 percent bonus depreciation,
- Research and development credits,
- Full exclusion for qualified small business stock gain,
- Many alternative energy tax provisions and
- Alternative minimum tax relief.
Besides the Social Security rate reduction, the Act also provides for a continuation of certain unemployment benefits for those individuals unemployed more than six months and would prevent a 27% cut in federal payments to doctors who treat Medicare patients, a reduction that threatened to make it harder for seniors to find physicians.
If you have any questions on how this provision may affect you or your business, please contact your Marcum tax professional.
A special thanks to article contributor Diane Giordano.