In turbulent times, people have been known to heave a sigh of relief and laud the absence of any news – and claim that no news is really good news! Similarly with taxes – especially when we are expecting to be hit by a rise in taxes – a tax cut is truly fantastic news, even if it is just for the next 2 months! Let us not bicker about the quantum of cut, or the duration just yet. Happy holidays, to everyone out there, who stand to gain from the payroll tax cut and/or the benefits just announced.
As of now, here are the details:
The two-month extension does not extend to other tax provisions set to expire at the end of the year like the Work Opportunity Tax Credit, Research and Development credit for businesses and a state and local sales tax deduction for individuals. Also there was no fix to offset the Alternative Minimum Tax when filing taxes for 2012. The unenviable task of financing the year-long extensions and the ensuing deficits through spending cuts and new fees lies with the administration – in what the President described as serious and difficult work to be tackled in the New Year.
The Economic and Political Compulsions:
No amount of political one-upmanship was going to help any politician involved in the debate, whether in the ruling party or the opposition. With elections round the corner, a voter backlash from the middle classes forms the stuff of a political nightmare or worse. Moreover, analysts are quite clear in predicting that a failure to extend the tax cuts may well push the economy back into another recession in 2012. The economy may be showing slow but sure signs of recovery but the unemployment numbers are still worrisome and this is definitely no time to take away unemployment benefits for the millions of capable individuals whose willing hands and heads are failing to find them suitable employment for reasons extraneous to their caliber and capabilities.
Pitched battles between the Democrats and Republicans are bound to provide a lot of diversion as the Democrats seek to impose higher taxes on the wealthy, Republicans want to reduce the federal workforce and freeze pay for government employees, among other spending-cut options. By taxing the over $1 million club – through the Millionaires’ Surtax – the Democrats wish to bridge the gap in the face of reduced credit rating for the country and the pressure to exercise fiscal responsibility to raise revenues and reduce budget deficits. Then there are doubts about the possibility of the tax cuts becoming as permanent as those proposed by President Bush, still active after 11 years. Though the demand for Treasuries remains unabated, there is strong pressure on America to regain lost ground in credit rating and to avoid the slippery slope of a further fall in credit rating through proactively reduced borrowings and improve fiscal measures and meet the rating requirements. Other issues of contention include the demands to re-write the policy with weaker rules on industrial emissions and the system of unemployment insurance system – and the need to drug-test those deriving unemployment benefits (or, premature retirement benefits as they are currently being termed), and to put systems in place to make them earn high school diplomas. Both parties agree on not reducing the Medicare reimbursement of doctors.
Employers need to implement the new payroll tax rate as early as possible, but not later than Jan 31, 2012. For Social Security tax withheld during January, employers should offset the adjustments as early as possible but not later than March 31, 2012. The IRS has advised a recapture provision, for those who get paid more than $18,350 in their first two months’ wages, and stipulates the recovery of a 2% tax on such income over and above the $18,350, to be paid in 2013 when filing their federal tax return. This is necessary to ensure that people earning $110,100 in the first two months of the year (which is the period stipulated for the tax break unless it gets extended) will get to avail 100% of the break compared to people who earn less.
The IRS has stepped in with some advice already and more may be forthcoming, based on further developments like more extensions. Let us only hope that all this talk of the impending need for complicated accounting will not really ruin the holidays for anyone – for now – as it may never be required for all we know at this juncture.
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