[Updated- 2012 Payroll Tax Credit Holiday, Unemployment Benefits and Medicare Doctor Payments Extended to Dec 31st] With House Republican support Congress has passed legislation extending the federal payroll tax holiday through the end of the year without demanding spending cuts to pay for it. This was a concession aimed at averting another repeat of their failed pre-Christmas showdown with the President and Democrats. The payroll tax cut drops an employees payroll withholding rate to 4.2 percent from 6.2 percent, giving the average worker an extra $85 a month.
President Obama hailed the agreement saying, “Congress did the right thing and voted to make sure that taxes would not go up on middle-class families in 2012.”
The bipartisan bill (H.R. 3630) also covered a tiered extension of unemployment benefits and Medicare reimbursements for doctors (doc-fix). Unemployment benefits were extended to between 40 and 73 weeks for new recipients (length varies by state unemployment), down from a uniform 99 weeks under older legislation. Doctors will not face reduced Medicare reimbursements thanks to the new legislation.
According to the CBO, the unfunded payroll tax extension will add nearly $90 billion to the federal deficit over 10 years. Other provisions like extending unemployment benefits and medicare reimbursements will be paid for by reducing the government’s contributions to the pensions of future federal employees and auctioning off parts of the broadband wireless spectrum.
** Get an update on the 2013 Payroll Tax Credit extension
[Updated Dec 2011] There is a fierce political debate going on in Congress to extend the payroll tax credit and unemployment benefits into 2012. The payroll tax credit which cuts 2% of an employees social security taxes for a saving of up to $1000, affects about 160 million Americans and is the biggest bone of contention on Capitol Hill. The payroll tax credit will expire at the end of 2011 if Congress doesn’t agree to extend it.
The Senate has passed an interim bill extending the tax cut through February 2012. But Republicans, who control the House of Representatives, are not happy with the bill and unless they pass it, it can not be sent to the President for approval. House Republicans want more spending cuts to fund the tax credit and other measures in the bill.
In addition to the payroll tax credit, the Senate bill contains provisions to extend benefits for the long-term unemployed and doctors who care for Medicare patients. Unless the bill is passed, all of these will expire on Dec. 31st 2011 and directly affect the bottom line of millions of Americans.
Ironically, the Senate bill that passed would raise $35.7 billion by increasing the guarantee fees that Fannie Mae and Freddie Mac charge to lenders for new home mortgages. So the same companies that Washington and the media love to beat up on, are not being used to fund the tax credit that will benefit millions of Americans.
[Update – 2012 Increase and Extension of Payroll Tax Cuts] In his latest jobs plan, the $447 billion Americans Jobs Act, the President has called for more than $245 billion in funding to extend and expand the payroll tax credits for workers and small business’. This includes:
- Extension of employee payroll tax cuts into 2012, which were due to expire this year, covering the first $106,800 in earnings. The proposal seeks to reduce the portion paid by employees in 2012 to 3.1% from 6.2%. The rate had been cut by 2% in 2011, under the bush tax cuts extension deal, and the increased extension in 2012 will provide about $1500 more in savings for the average family.
– The jobs plan also includes incentives for new hiring by small businesses via payroll social security tax exclusions. Businesses would get the same 3.1-point reduction on payroll taxes as employees for the first $5 million of their payroll. The full 6.2 percent employer contribution would be waived on the first $50 million net increase in a company’s payroll.
A number of people have noticed changes in their paychecks this month as result of the 2% payroll tax cut and expiry of the Making Work Pay tax credit. While the Obama administration had touted the 2011-2012 tax cut/new stimulus package extension as legislation that will benefit 95% of Americans, the sad truth is that the tax cut and credit expiry have in fact left low income earners (< $20,000 gross income) worse off.
For taxpayers making less than $20,000 a year ($40,000 for couples), the 2% payroll tax cut will turn out to be a tax hike when you factor in the expiry of the making work pay credit; which provided a flat $400 off federal withholding taxes to single filers and $800 to joint filers (and who earned less than $75/$150K) . Under the new tax laws, workers making $15,000 a year, for example, will pay $100 more in taxes during 2011 than in 2010. And if they file a joint return, they will pay $500 more. Those earning less could be hit even harder.
High Income earners benefit: Those who take home big paychecks, however, will see more money this year. A couple making $250,000 combined didn’t even qualify to collect the Making Work Pay credit, but this year, they could get a tax break worth more than $4,200.
51 million Americans will pay more in taxes this year than last year, according to the Urban-Brookings Tax Policy Center, including about 41 million low-income workers, half of whom make less than $19,000. Meanwhile, of the 72 million taxpayers who will benefit, nearly 40 million make more than $65,000. The payroll credit will put an estimated $110 billion into taxpayers’ pockets this year, almost twice as much as the $60 billion they got through Making Work Pay. But because much of the money from the payroll credit is going to higher income taxpayers, it might not be as effective as the Making Work Pay. (Detroit News)
I have also received a number of comments on this topic from people understandably confused about why their paychecks were smaller in January. The reason these folks saw a drop in their take home pay is primarily explained by the above and unfortunately unless they can increase their income they will have less take home pay for the foreseeable future. Everyone’s pay situation is different based on withholdings and employer sponsored benefits, so make sure you carefully review your paycheck to determine the impact of the new tax laws.
1 thought on “2012 Payroll Tax Credit Holiday Extended Till Year End. Extensions For Unemployment Benefits and Medicare Payments Also Approved”
And I thought I was the sensible one. Thanks for setting me srtahigt.