On February 17, 2012, Congress passed The Middle Class Tax Relief and Job Creation Act of 2012, sending the Act to President Obama to be signed into law. Once signed, the Act will extend the employee-side payroll tax cut (from 6.2% to 4.2%) through the end of 2012. The Act will not change the tax rates paid in recent months, but simply extend a temporary rate cut that was already in effect through the end of February 2012. The tax rate cut covers only the employee side of the Old-Age, Survivors, and Disability Insurance (OASDI) and does not reduce the employer side of OASDI taxes, which remain at 6.2%. The OASDI rate cut for self-employed individuals (which reduces total self-employment rates from 12.4% to 10.4%) has also been extended through the end of 2012.
The Joint Committee on Taxation estimated that approximately 170 million individuals will benefit from the payroll tax reduction, with the White House estimating that taxpayers will see an average of $1,000 in tax reductions in 2012 from the tax rate cut. All wage earners and self-employed individuals will benefit from the payroll tax cut extension up to the Social Security earnings cap of $110,100. The reduced OASDI withholding will have no effect on an individual’s future Social Security benefits.
Included in the Act was a repeal of the recapture provision included in the short-term extension that covered January and February, 2012. Under this provision, taxpayers who earned more than $18,350 in remuneration during January and February 2012 would been required to pay a recapture tax in 2013 when the individual filed their 2012 income tax return. The Act repealed the recapture provision for January and February.
Along with the payroll tax cut extension, the Act also extended unemployment benefits and included a Medicare “doc fix.” Provisions discussed, but not included in the Act, included an extension of 100% bonus depreciation and a tax extenders package that would have extended the research tax credit, state and local sales tax deductions, and the higher education tuition deduction among many others. Many of these provisions will likely be addressed at a later time.
If you have any questions about how the provisions of the Middle Class Tax Relief and Job Creation Act of 2012 will affect you or your business, please call Cassady Schiller for a more in-depth discussion.