What is Next For the Payroll Tax Cut?
At the last minute in 2011, Congress passed a 2-month extension of the payroll tax cut, which reduces the American worker’s social security tax to 4.2% from 6.2%. Less publicized, the extension also extended federal unemployment benefits for the long-term unemployed AND temporarily forestalled a deep cut in doctors’ Medicare fees that would make it harder for the elderly to find doctors who would treat them. The cost of the 2-month extension will be paid for by increasing the fees charged to mortgage lenders by Government Sponsored Entities like Fannie Mae and Freddie Mac. Thus, the same middle income families who are helped by the payroll tax cut will pay for the cut in increased mortgage fees.
Now, the two sides need to figure out how to extend all three measures through the end of 2012 at a $160 billion cost. How quickly will an extension be reached, if at all? We predict the law will be extended, but probably not until just before the February 29 expiration date. Why? The Democrats believe that, if the talks take a long time, this will damage the Republicans, who have already been criticized for wanting to increase taxes on 160 million workers while standing firm on not increasing taxes on the wealthiest of taxpayers. Meanwhile the Republicans insist that the cost of the extension be covered by revenue increases; however, they object to the Democratic proposal to cover the cost with a millionaire surtax or a limit on tax deductions for the very wealthy.
On February 3, Democratic leaders announced they have a backup plan to cover the cost of the continuation of the payroll tax cut and the related provisions. No details have been revealed, however.
What does this mean for the average taxpayer? The payroll tax cut lowers the amount of social security funds available for the checks paid out to the nation’s seniors. Monies coming in from social security taxes generally go right out in payments to retirees. So, let’s look at strategies to alleviate dependence on social security:
- Use your employer 401(k) or retirement plan matching – a $150 monthly contribution can be a $300 contribution with the employer match
- Have your HR department deposit a small, say 5%, percentage of your paycheck into a savings account that charges no fees
- Fund an IRA before 4/15/12 – you can contribute up to $5,000 and potentially reduce your taxes too!
Call Diane Burke at Cover & Rossiter at (302) 656 – 6632 for the latest information on tax changes and how you can respond in ways that secure your financial future.