Tuesday, December 27, 2011

Payroll Tax Cut Extension Includes Recapture Provision

The article below is almost verbatim of an IRS press release. In plain English, the 2% reduction is good for one-sixth of the 2012 FICA wage base (i.e., one-sixth of $110,100 or $18,350). Employers will withhold at the 4.2% rate through February on all wages paid to an employee, even if they are in excess of $18,350. The employee will “recapture” the excess tax break on his or her personal 2012 Form 1040 tax return filed in early 2013 (assuming that the 2% reduction is not extended past the first two months of 2012).

The Internal Revenue Service plans to issue additional guidance on the temporary two-month extension of the payroll tax cut, including how a new “recapture” provision for high-income employees will be implemented.

The tax cut extension was passed by Congress on Friday and signed into law by President Obama later that day, with plans to return in January to find a way to agree on how to pay for extending the tax cut through the rest of the year (see Congress Passes 2-Month Payroll Tax Cut Extension). The IRS said Friday that nearly 160 million would benefit from the extension of the reduced payroll tax rate that has been in effect for 2011.

The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits, the IRS noted. The tax cut extension is paid for with an increase on the guarantee fee paid by lenders on all new mortgage loans whose principal and interest are backed by Fannie Mae and Freddie Mac.

Employers should implement the new payroll tax rate as soon as possible in 2012, but not later than Jan. 31, 2012, the IRS advised. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS said it would closely monitor the situation in case future legislation changes the recapture provision.

The IRS said it would also issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due April 30, 2012.

The legislation passed by Congress on Friday includes some technical corrections to address the concerns of payroll processors and small businesses about how the two-month extension would work (see House Republicans to Offer 2-Month Payroll tax Cut Bill). It corrects a flaw in the Senate provision by allowing employers to withhold employee payroll taxes at the reduced rate (4.2 percent) on all wages paid during the two-month period, subject only to the full 2012 wage base ($110,100) and without regard to the new $18,350 cap on wages earned through the end of February.

If an employee’s wages during the first two months of 2012 exceed $18,350 (two-twelfths of the wage base of $110,100), an amount equal to 2 percent of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012. However, this rule would only apply if the payroll tax reduction is not extended for the remainder of 2012, and a conference committee is expected to convene soon in order to negotiate a full-year extension.

Friday, December 23, 2011

House, Senate Clear Payroll-Tax Accord


WASHINGTON—The House and Senate on Friday approved a two-month extension of the payroll-tax cut, averting an increase that would have left workers with less take-home pay next year.

Passage came after a nearly weeklong impasse that ended when House Speaker John Boehner (R, Ohio) bowed to increasing pressure from within his own party and agreed to the short-term extension.

The $33 billion package also provides extended federal unemployment benefits for two months, avoids a cut in payments to doctors who treat Medicare patients and compels the Obama administration to act within 60 days on a permit for TransCanada Corp.'s proposed Keystone XL pipeline expansion.

The deal, which forestalls a Jan. 1 tax increase on 160 million workers, represents a retreat for the House GOP, which had been at odds with Senate Republicans and party elders who feared a backlash in the 2012 elections if the tax break was allowed to expire.

The agreement is essentially the same package negotiated by the Democratic-controlled Senate that Mr. Boehner's House rejected earlier this week.

One difference in the new agreement is the elimination of a Senate-crafted provision businesses believed would be burdensome. That provision would have changed the way payroll taxes would have been deducted for higher-paid workers, a move that would have meant changing payroll systems.

Mr. Boehner changed course a few hours after Senate Minority Leader Mitch McConnell (R., Ky.) stepped into the debate and urged House Republicans to pass the two-month extension approved by the Senate last Saturday in an 89-10 vote. As part of the new deal, all sides committed to negotiating early next year on a full-year extension of the tax break.

The impasse was a rare split between the two Republican leaders, who for most of this year have worked hand in glove to battle President Barack Obama. The split reflects, in part, the pressure Mr. Boehner faces from the GOP's tea-party faction, compared with Mr. McConnell, who is more willing to accept tactical victories.

Mr. Boehner's leadership within his own caucus may suffer new strains from the retreat, the latest in a string of tussles he has had with rank-and-file members this year on issues ranging from government funding to the debt ceiling. When he announced his decision to compromise in a 10-minute conference call with Republicans around the country Thursday evening, Mr. Boehner took no questions.

The House GOP, in appearing to risk allowing the tax break to lapse Jan. 1, did some damage to the party's reputation of holding the line on tax increases. The standoff also threatened what had been a major victory for Republicans: including a provision in the original tax agreement to force Mr. Obama to make a quicker decision on building the Keystone XL pipeline, which the president had previously punted until after the 2012 elections. That provision remains in the new agreement.

So topsy-turvy were the politics Thursday that it brought the spectacle of Mr. Obama endorsing the words of Mr. McConnell, the man who began 2011 pledging to do all he could to prevent the president's re-election.

"Democrats agree with the Republican leader of the Senate," said Mr. Obama. "This is an issue where an overwhelming number of people in both parties agree. Has this place gotten so dysfunctional that even when people agree to things, we can't do it?"

Announcing the pact on his Twitter feed, Mr. Boehner said the agreement was designed to "ensure taxes do not increase for working families on January 1 while ensuring that a complex new reporting burden is not unintentionally imposed on small business job creators."

At issue is extending the current 4.2% payroll tax levied to fund Social Security, rather than allowing it to return to 6.2% on Jan. 1, its rate before this year. House Republicans, in pushing for a full-year extension of the tax break, have cast their position as one of principle over politics. They conceded Thursday that they were losing the public-relations battle by their fighting.

"We're not doing this for the politics," Rep. Greg Walden (R., Ore.) told reporters. "You all have pointed this out pretty clearly."

Speaking to reporters Thursday evening, Mr. Boehner acknowledged that his party might suffer from picking this fight. "It might not have been politically the smartest thing in the world," he said. "Sometimes it's hard to do the right thing and sometimes it's politically difficult to do the right thing."

A growing number of Republicans urged the House this week to cut their political losses and pass the short-term extension. Those making that push, including GOP presidential candidate Newt Gingrich and former GOP presidential nominee John McCain, made their case even louder on Thursday.

"At this point, the House should pass the Senate's short-term extension to ensure 160 million hard-working Americans won't lose important tax relief at the end of this year,'' said Sen. Olympia Snowe (R., Maine).

No voice was more important than that of Mr. McConnell, who had been silent as the storm brewed. He had considered the Senate deal a big Republican victory because it included language on the Keystone pipeline.

Instead of seen as backtracking on the oil pipeline and his demand for a one-year extension, President Obama this week became the defender of a two-month tax cut. The White House mounted a daily public-relations effort to advocate extending the tax cut, but in the end, White House officials believed Mr. McConnell's statement Thursday was key to expediting the drama's conclusion.

Before agreeing to the new deal, Republicans insisted on language to address a problem businesses face in the two-month extension, aides said. The Senate bill imposed a cap on how much salary would be subject to the lower tax rate. That was dropped in an effort to be sure businesses can process payroll taxes under the accounting structure now in place, a House GOP aide said.

The bill's $33 billion cost is expected to be covered by an increase in fees charged to mortgage lenders by government housing agencies Fannie Mae and Freddie Mac. That has been criticized by the firms' regulator and industry analysts, who say it will complicate the task of revamping the mortgage giants.

The fee increase, expected to raise about $35.7 billion in revenue over 10 years, likely would be passed on to new-home buyers, raising their monthly mortgage payments by as much as $15 on mortgages of $210,000.

—Janet Hook, Laura Meckler and Kristina Peterson contributed to this article.

Tuesday, December 20, 2011

10 Things Medicare Won't Tell You


Here are the 10 items. Click on the link above to read the entire article.
  1. We fork over millions for unproven procedures.
  2. Think Social Security is broke? Just look at Medicare.
  3. We pay for dead people.
  4. Don't expect a five-star plan.
  5. We're not popular with many doctors.
  6. We get ripped off a lot.
  7. We don't cover a lot of the care seniors need most.
  8. Paws off that cash, grandpa: Your settlement is ours.
  9. Complain all you want ...
  10. Want Your Way? Just ask.