In December, Congress was able to pass only a two-month extension of payroll tax relief — on the condition that Senate and House conferees be appointed to work on a full-year extension. That conference committee now has negotiated an agreement, and the Middle Class Tax Relief and Job Creation Act of 2012 will extend through Dec. 31, 2012, the 2010 Tax Relief act provision that reduced the employee portion of the Social Security tax on earned income from 6.2% to 4.2%.
For 2012, the maximum taxable wage base for Social Security taxes is $110,100 (up from $106,800 in 2011). So, the maximum 2012 tax savings from this break will be $2,202.
The act also extends through the end of the year other provisions that had previously been extended for only two months:
• Enhanced unemployment benefits — but reducing the number of weeks of benefits available as the year progresses,
• Current Medicare payment rates for physician services, and
• Other Medicare-related provisions that are normally extended when physician payment rates are extended.
The act also includes other provisions, such as some unemployment benefits reforms, the repeal of certain timing shifts of corporate estimated tax payments and an increase in the amount certain federal employees contribute to their retirement pensions.
The main point of debate regarding a full-year extension of payroll tax relief, as well as the other extensions, has been how to pay for them. This legislation ended up being passed without being completely paid for.
This isn’t the end of the debate over how to pay for tax break extensions, however. Congress has yet to address many other tax breaks that expired at the end of 2011, such as alternative minimum tax relief, the research credit and the deduction for state and local sales tax in lieu of state and local income taxes. In addition, a variety of rates and other breaks are set to expire at the end of 2012.
All of this tax law uncertainty makes tax planning for both businesses and individuals especially complicated this year. We’d be pleased to answer any questions you have and help you determine what steps you should take now and throughout the year to help reduce your tax bill.