Payroll tax cut extension with a lump of coal
Thursday, January 5th, 2012
Congress extended the payroll tax cut for sixty days after weeks of posturing. The 2% reduction in Social Security tax withholding will continue to put a little extra money in employees’ pockets through the end of February 2012, but Congress threw in a lump of coal with its Christmas gift. If you earn too much in January and February, you will be required to pay back part of that 2% tax cut when you file your tax return next year.
Here’s how it works. Everyone pays Social Security tax on earned income up to a yearly maximum ($110,100 in 2012). If you earned that amount equally over the course of the year, in two months you would earn $18,350. This law says that if you earn more than $18,350 in the first two months of 2012, you must pay back the 2% tax cut you received on the excess. You will report that on your tax return for 2012 when you file in 2013.
In other words, if you try to maximize your tax cut by accelerating your earned income for the year into January and February, it’s only temporary. Linda Dyer, our firm’s tax guru, has calculated that the most you will have to pay back is $1,835 if you get paid the maximum $110,100 in January and February [($110,100-$18,350)x2%].
Not even Santa Claus knows what good or bad will come out of the next round of negotiations aimed at extending the payroll tax cut for the entire year. We can hope that this lump of coal disappears in the hot air sure to circulate in the halls of the Capitol this winter.