Currently, employees pay 4.2% Social Security taxes up to $106,800 in wages. Additionally, they pay 1.45% Medicare tax on all of their earnings. The employer must match these amounts and remit to the government. The 2010 legislation decreased the employee's Social Security contribution from 6.2% to 4.2%. However, this is only effective for 2011. The idea was to give employees more money in their paychecks so they could spend it and boost the economy. The employer percentage remained the same.
With unemployment stubbornly staying around 9% and the drumbeat of other economic news being negative, the Obama administration is looking for ways to simulate the economy. A cut in the employer's payroll taxes will make it less expensive for employers to hire more employees. While this may be a step in the right direction, it just becomes another small patch, and a temporary one at that. The federal income tax code has become a giant quilt that has been assembled through the years by constantly patching it.
There has been no change in the federal income tax brackets as they have essentially been frozen from 2003 and will continue into 2012. If Congress fails to act, in 2013 the income tax rates will revert back to their 2002 rates. This essentially will increase the highest two rates from 33% to 36% and $35 to 39.6%, respectively. The rate for qualified dividends will rise from 15% to your ordinary tax bracket, which could be as high as 39.6%. The long term capital gains tax will rise from 15% to 20%.
The federal estate tax exclusion was increased from $3.5 million in 2009 to $5 million in 2011. Additionally, the maximum tax bracket was decreased from 55% to 35%. This exclusion and tax rate is effective for 2011 and 2012. This is quite an increase in the exclusion and decrease in the tax rate. This will allow taxpayers to pass on more assets to their beneficiaries without being subject to tax.
ACTION ITEM: Employees should enjoy the payroll tax cut they have this year. Employees face an increase in their Social Security taxes beginning in 2012 if the temporary payroll tax cut is not extended. This may indeed be “The Last Tax Cut.”
Thomas F. Scanlon, CPA, CFP®