Q&A about the end of the payroll tax holiday

Posted: January 07, 2013

Despite all the drama leading up to New Year's Day, the tax deal signed Thursday by President Obama did virtually nothing to change the trajectory of the U.S. government's debt-laden finances.

The deal raised some taxes, but not enough to prevent the slow starvation of federal programs to help the poor and elderly, according to advocates for such programs.

By leaving spending cuts off the table for the most part, the American Taxpayer Relief Act of 2012 set up what is sure to be an ugly fight over raising the nation's debt limit by early March.

In the meantime, all wage-earners will see 2 percent less money in their paychecks, because the law did nothing to prevent the end of the so-called payroll tax holiday.

Here are some questions and answers on key aspects of the law:

Question: When will I see less money in my paycheck because of the reversion of the Social Security tax to 6.2 percent from 4.2 percent?

Answer: That could happen in your next paycheck because the payroll tax holiday was already set to expire, said Christian Hoyt, president of PayUSA Inc., a payroll-services company in King of Prussia.

The restored Social Security tax rate applies to salaries up to $113,700. Wages above that level are not subject to the Social Security tax. That means the biggest possible increase for a single wage-earner will be $2,425, according to payroll-services firm ADP.

A worker who grosses $50,000 a year will take home $1,000 less.

Q: Is it difficult for payroll companies to implement the new rules?

A: The Internal Revenue Service issued updated tax-withholding tables Thursday, but the changes affect very few people at the high end of the income scale. "It would have gotten worse," Hoyt said, "if they had waited and made any significant changes."

Q: Will low-income workers be shielded in some way from that higher Social Security tax?

A: No, said Bob Williams, of the Tax Policy Center in Washington, because nothing changed about the Earned Income Tax Credit in the American Taxpayer Relief Act of 2012.

"Net, they are still losing the reduction in payroll taxes they enjoyed the last two years," he said.

Q: Given that all wage-earners have to pay that additional tax, won't that hurt the economy?

A: IHS Global Insight chief U.S. economist Nigel Gault estimated that the end of the payroll tax holiday would knock 0.4 percentage points off this year's U.S. economic growth. The additional payroll tax will cost the Philadelphia region about $3.5 billion this year, according to Moody's Analytics.

The impact of higher taxes on the wealthy is expected to be minimal, cushioned by a drop in the savings rate, Gault said. Overall, IHS, based in Lexington, Mass., trimmed its forecast for U.S. economic growth this year to 1.7 percent, from 1.9 percent.

Q: When will I be able to file my 2012 taxes?

A: The IRS issued a statement: "The IRS is currently reviewing the details of this week's tax legislation and assessing what impact it will have on this year's filing season. The IRS will soon make available additional information on when taxpayers can start filing 2012 tax returns."

Q: The highest rate for married couples with at least $450,000 in taxable income increased to 39.6 percent. When did tax rates last go up?

A: This is the first increase since 1993, said James M. Brower Jr., a partner in the Jenkintown accounting firm G3 of PA L.L.C. In President Clinton's first year in office, the highest rate went to 39.6 percent from 31 percent, Brower said.

In the new law, Congress also adopted tax-rate increases on capital gains and dividends for top earners, as well as a higher rate for the biggest estates. The fear among some taxpayers was that those increases would be bigger, accountants said.

Q: Are the increases a prelude to future tax hikes?

A: "I think that's probably it" with increases in tax rates, Brower said. "The Republicans are still going to control the House for the next two years. I just don't see taxes going up anymore."

Q: What's the damage to the wealthy?

A: It's complicated. It takes a great deal more than $450,000 in gross income for a married couple to land in the top 39.6 percent tax bracket.

Phil Schwindt, a research analyst with CCH, a tax and accounting information firm in Riverwoods, Ill., prepared some scenarios, for Pennsylvania and New Jersey.

A couple in either state with combined gross income of $500,000 could actually pay $560 less under the new law, depending on their deductions and excluding the 2 percent increase in Social Security taxes and a new Medicare tax. Their deductions would keep them out of the highest bracket.

A power couple with $795,000 in adjusted gross income, however, could pay 11 percent more, again depending on the level of deductions and excluding the higher Social Security tax and the additional Medicare tax, the CCH analysis found.

The tax increase is $22,711 in New Jersey and $24,004 in Pennsylvania, with the difference caused by state tax laws.

Q: How did the rich react?

A: "I have not had one call from a client," said Harry "Bud" Wilson, of the Cherry Hill accounting firm Alloy, Silverstein, Shapiro, Adams, Mulford, Cicalese, Wilson & Co.

"I guess they were numb to the whole thing because it's taken so much time and there's been so much talk about it. Then, in the end," he said, "they basically extended a lot of things that were already there."


Contact Harold Brubaker

at 215-854-4651 or hbrubaker@phillynews.com.

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