Ask The Advisor: March 2012

Ask The Advisor: March 2012

How Would The Social Security Payroll Tax Cut Affect Benefits?

Q: I’m close to retirement and pay the maximum taxes on my wages. How would the Social Security payroll tax cut affect my retirement benefits?

A: Your retirement benefits will not be reduced by the payroll tax cut legislation, but because you pay the maximum, you may be among a number of workers who may have a tax surprise in 2013. If you earn more than $110,100 this year you could be affected.

Last December Congress passed, and President Obama signed into law, payroll tax cut continuation legislation that extended a 2% payroll tax cut for two months — January and February of 2012. This provided Members of Congress with more time to work out differences in how to pay for the legislation. The two-month bill continued the reduction of the Social Security tax withholding rate that employees pay, from 6.2% to 4.2% through February, 2012.

While the deal was good news to workers who otherwise faced a tax increase on January 1st of this year, don’t spend your extra money yet — you may need it. The two -month extension bill included a buried “recapture tax” provision. It only applies to employees who received more than $18,350 a month in wages for the months of January and February. (When you average the 2012 maximum taxable wage base of $110,100 over the year, $18,350 is the equivalent of two months pay.)

This recapture tax is 2% of the wages you received during January and February in excess of $18,350 (and not greater than $110,100). The recapture tax can’t be reduced by credits or deductions and you pay it in 2013 when you file your income tax return for calendar year 2012. As this issue goes to publication,

Congress is expected to extend the pay cut through the end of the year. TSCL is closely monitoring the final legislation to learn whether the “recapture tax” provision remains in the final legislation and will be extended through the end of the year.

To stay informed on this issue, visit the TSCL web site and check our weekly legislative updates here.

Sources: “Payroll Tax Cut Temporarily Extended Into 2012,” IRS, December 23, 2011.