The Social Security Tax Cut May Not Apply to You

Congress has reached a new level of confusing the American public. We have the new 2-month Social Security tax cut. And, it applies to all working Americans (except those like Senators and Representatives whose wages as elected officials I think are exempted from Social Security). So, for the months of January and February, we all get a decrease of 2% in our Social Security taxes. Fantastic!

Now, for some explanation. Generally, a person pays into the Social Security system at the rate of 7.65% of pay up to the Social Security Wage Base (I believe that is $110,100 for 2012). Above that level of wages, a person pays in at the rate of 1.45% of pay. And, for each dollar that a person pays in, their employer pays in an equal amount. If you are self-employed, you are both the employer and the employee, so you pay both parts.

Now, that sounds unfair, doesn't it, that you stop paying in the Old-Age, Survivor and Disability Insurance part (the first 6.2%) after your pay reaches the wage base? Well, you do need to consider that any pay that you receive that is above the wage base is not used in computing your eventual Social Security benefit. For those who are still with me, the other 1.45% is used for Health Insurance, i.e., Medicare.

Here is the good and fair news -- we all get that that cut in our OASDI (the 6.2% piece) during the months of January and February 2012 from 6.2% to 4.2%. But, some of us are deemed to apparently have no need for the extra 2%, so we have the honor of getting to pay a recapture tax, an increase to your federal income tax.

Yeehaw, gotta love it, a recapture tax. I know, what in the world is a recapture tax. Read on, poor reader.

Start by dividing $110,100 (the wage base) by 12 (to get a monthly rate) and you get $9,175. Double that to get a two-month rate and you are up to $18,350.

Now, suppose your Social Security wages for January and February are more than $18,350. [For those who aren't sure, Social Security wages look a lot like your gross pay before taxes are taken out. If you pay for certain welfare benefits on a pre-tax basis, they get taken out. And, if you defer compensation to a 401(k) or similar plan or even to a nonqualified deferred compensation plan to the extent that the amount is vested, those get included.]

If you are fortunate enough to still have your Social Security wages for that two-month period exceed $18,350, then you have the honor of paying a recapture tax calculated as follows:

1. Subtract $18,350 from your Social Security wages for the months of January and February combined. If the answer is 0 or less, then this doesn't apply to you. If the answer is greater than $18,350, then call it $18,350.
2. Take the result from step 1 and multiply it by 2%
3. This is the additional income tax that you will owe for 2012 and it is called a recapture tax.

Think of the scenarios. Lots of companies pay bonuses for your performance during the previous year (2011, in this case) during January or February. For people with base pay less than $110,100, your bonus could put you into recapture territory. Maybe you are fortunate enough to be entitled to a really big bonus for 2011 paid during January or February 2012. It might run through recapture territory into I-Don't-Owe-Recapture-Taxes-On-This Territory. And, then, there are the people whose bonuses will get paid during the first half of March. They get the old-fashioned treatment.

Got it? Good!

Now, think about your paycheck. If you are like lots of Americans, the payroll of your company gets handled by an outside provider. And, miraculously, once a week, once every two weeks, once or twice every month, the right amount of pay gets deposited electronically into your checking (or savings) account. Hmm, do you think that will happen now?

The IRS thinks that it may not. In fact, they have already published rules for companies and individuals that mess this up. Doesn't that just build up your confidence?

So, why do we have this nonsense? In my opinion, it's all because our government no longer chooses to govern. Instead, the two major parties wage a constant battle to see which can find a way to embarrass the other. Does it matter if a law is a good law? Of course not. Does it matter if the law can be administered? Of  course not. Does it matter if the law says what it is purported to say? Of course not.

The Democrats appear to have won this game of shame. It's not their first win. But, Republican lovers shouldn't feel left out. They have won the shame game about the same number of times.

So, now we have a middle-class tax cut ... unless your bonus gets paid at the wrong time, or unless you make too much overtime during January and February, or unless ...

Washington, We Have a Problem

I reported last week on the American Jobs of 2011, President Obama's landmark jobs legislation introduced to the country during a joint session of Congress last Thursday night. In a stunning act of name-stealing, Representative Louie Gohmert (D-TX) has introduced HR 2911 -- The American Jobs Act of 2911.

Representative Gohmert's bill is not nearly as thick as President Obama's, but each, in its own way, purports that it will achieve the same goals.

The good news is that I can explain all of the provisions of Representative Gohmert's bill to you here in a clear and concise manner.

1. Effective for taxable years beginning after December 31, 2011, the corporate income tax shall be zero percent of corporate income.
2. Effective for taxable years beginning after December 31, 2011, the amount of the Corporate Alternative Minimum Tax shall be zero.

That's it. This is not an April Fool's joke.

Whose bill do you like better?

May All the Procrastinators Bless Emancipation Day

If you have made it this far, then first, you are probably, like I often am, a procrastinator, and second, wondering what in the world is Emancipation Day, and finally, why do I care?

Emancipation Day is a holiday in the District of Columbia celebrating President Lincoln issuing the Emancipation Proclamation. It falls (normally) on April 16. This year, April 16 is a Saturday and the District is observing the holiday on April 15 -- tax day. And, of course, you knew that District holidays count as federal holidays for tax purposes.

So, since April 18 is the first business day in the District beginning on or after April 15 this year, the IRS has released Information Release 2011-1 officially postponing the regular tax filing deadline until April 18. Of course, all true procrastinators know that the extended tax filing deadline for 2011 is October 17 (October 15 falls on a Saturday).

Also, in the information release is a formal announcement that if you itemize deductions, you need to wait until mid-February, at least, to file (procrastinators don't care). Contrary to popular belief, this is not the fault of the IRS. Here's why.

The IRS works on a budget. Congress appropriates only so many dollars to them every year, and among other things, they find out what they can do with those dollars. During the late fall when the IRS was updating its software for the upcoming tax filing season, the law said that the tax cuts originally enacted as part of EGTRRA in 2001 (Bush era tax cuts) would sunset. So, the IRS not being able to read the collective minds of Congress and the President built their software around the law as written.

Of course, the law changed, and as a result, the IRS software is not ready to handle itemized deductions under the new (you may think of it as old) tax law.

So, pick your favorite whipping post to blame, but make it one from the political arena, not from the IRS.

GOP-Obama Compromise Would Lower 2011 Employee Portion of FICA Taxes

Have you been hiding under a rock? If you are reading this, I'm guessing not. In that case, you know that (surprise, surprise) the President and Congressional Republicans reached a compromise yesterday.

The well-publicized items were that:

• The so-called Bush tax cuts (enacted through EGTRRA in 2001) will become permanent for incomes less than $200,000 (for singles) and $250,000 (for married)
• For higher earners, those cuts will delay their scheduled sunset until the end of 2012 presumably setting up more Congressional warfare after the 2012 elections
• Renew jobless benefits for the long-term unemployed

Not publicized, but perhaps more important to many were these:

• A 2% of pay reduction in the employee-provided portion of FICA (Social Security) taxes for 2011 only. What this means is that workers will get an effective pay increase for 2011 of 2% on the first $106,800 of pay. This may not seem like much, but more US workers than not pay more in FICA taxes than they do in federal income taxes
• Estates would be taxed at a 35% rate for amounts in excess of $5 million

Beware! This is not law yet. House Democrats will need to support this in order to pass it in December. And, whether an associated bill comes to the Senate floor during the lame-duck session of this Congress or during the next Congress, a meaningful number of Senate Democrats would have to support passage in order to make it law.

We'll continue to cover this here.