The Payroll Tax Two-Month Holiday (Continued)

Here is the IRS announcement last Friday (December 23) about the two-month payroll tax holiday.

IR-2011-124, Dec. 23, 2011

WASHINGTON — Nearly 160 million workers will benefit from the extension of the educed payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

OBSERVATION: Kruse & Crawford CPAs is one of the “employers and payroll companies” that will handle the withholding changes. So, we have a payroll tax holiday that does not last all the months in a quarter. Apparently Congress realized that the servicers may not have been prepared for this, so Congress decreed that we have an additional month to get it right.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).    

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

OBSERVATION: If you think about this, there is a certain amount of sense. The FICA wage base for 2012 is $110,100. Since the holiday is for less than the entire year, Congress felt it necessary to prorate the wage base, as otherwise one could “game” the system. One would do that by taking his/her first $110,100 of payroll in the first two months of the year. That would require noncommon fact patterns, but it could and would happen. I know that we – as tax planners - would have taken advantage of it where possible for our clients.

OBSERVATION: How is the tax preparer to know if someone received more than $18,350 of payroll in the first two months? Will there be yet another “box” on the 2012 W-2 for this?

COMMENT: I suspect that Congress will extend the holiday for the full year, and the clawback provision will be deleted at that time.

Retirement and Health Plan Limits for 2012

Here are the 2012 contribution limits for the following retirement plans:

·         401(k) limits increase from $16,500 to $17,000. The same limit applies to 403(b) and  457 plans.

·         IRA limits remain the same at $5,000

·         SEP limits increase from $49,000 to $50,000

·         SIMPLE limits remain the same at $11,500

·         Catch-up contributions remain the same

o   $5,500 for 401(k), 403(b) and 457 plans

o   $2,500 for SIMPLEs

o   $1,000 for IRAs

Here are the new limits for high deductible health plans:

·         Health Savings Accounts

o   Individual contribution limits increase from $3,050 to $3,100

o   Family contribution limits increase from $6,150 to $6,250

·         High Deductible Health Plans

o   Minimum out-of-pocket limits remain the same at $1,200 and $2,400 for individuals and families, respectively

o   Maximum out-of-pocket limits increase from $5,950 to $6,050 for individuals and from $11,900 to $12,100 for families

·         Flexible Spending Accounts

o   No federal limits for 2012 but your employer may designate a limit

o   Federal limit of $2,500 beginning in 2013

The New 1099 For Credit Card Reporting

It’s been over a year since we talked about the new IRS Form 1099-K. This was part of the Housing Assistance Act of 2008, and it was to – at least partially - “offset” the cost of the first homebuyer’s credit.

This is Congress passing laws, mind you, so the reporting did not apply until sales made on or after January 1, 2011. This means you may be receiving this new 1099 during the 2012 tax filing season.

Let’s talk about the “why” for this form.

Say that you are a vendor on eBay or Amazon. It used to be that eBay or Amazon did not have to send you a tax reporting form. Why would they? They did not pay you; rather, a number of buyers using eBay or Amazon paid you. Let’s use another example. Let’s say that you use PayPal or Google Checkout on your website. As a third party payment network, they did not have to report the transaction. Why would they? They did not pay you; they just processed the transaction whereby some else paid you.

This caught the attention of a Congress that has all but gone through our sofa cushions for the next thing to tax.

So, let’s say that you are selling stuff on eBay or otherwise accepting payment through PayPal. Will you receive a 1099-K? It depends. If you have sales of less than $20,000 a year or fewer than 200 transactions per year, then 1099-K reporting will not be necessary.

The look and feel of Form 1099-K is very similar to Form 1099-INT used by banks to report interest and Form 1099-DIV used to report dividends.

Are we are expecting problems with the new 1099-Ks? Oh yes. The 1099-K will include sales tax and shipping charges, for example. The 1099-K will report the gross amount of payment card and third-party network payments, so one has to be careful with the reporting of refunds. The IRS is already talking about segregating receipts on different lines of the tax forms so that they can match to the 1099-Ks. When you consider that the IRS has a computer-matching program that generates notices without the intercession of human eyes, this may well be a disaster waiting to happen.

FATCA Filing Season

This past Saturday the IRS released the final version of Form 8938, Statement of Specified Foreign Financial Assets, and on Monday released the instructions. This form is in response to FATCA, and represents a further tightening of reporting requirements for foreign income and assets.

What do you have to report? The easy answer is overseas bank accounts and securities accounts. It gets a little trickier with hedge and private equity funds. It will also pick up your loan to Grandma Gretchen. This is reporting for foreign assets, not just foreign bank accounts.

Here are the dollar amounts if you live in the U.S.:

·         If single or married filing separately

o   $50,000 on the last day of the year or $75,000 at any time during the year

·         If married filing jointly

o   $100,000 on the last day of the year or $150,000 at any time during the year

Here are the dollar amounts if you live overseas:

·         If single or married filing separately

o   $200,000 on the last day of the year or $300,000 at any time during the year

·         If married filing jointly

o   $400,000 on the last day of the year or $600,000 at any time during the year

Are the dollar thresholds ridiculously low? Of course.

Form 8938 does not replace the FBAR (TD-F 90.22.1), which is filed separately from your income tax return and is due in Detroit by June 30^th every year.

Eventually the IRS intends for Form 8938 to also apply to domestic entities, but for right now the IRS is limiting its reach to only individuals.

My take?

We used to expect that the IRS would not assess penalties unless tax was due. That in turn meant that we did not overly fear information returns - that is, returns with numbers on them but no line that said “tax due.” There were some exceptions, such as W-2s and 1099s, of course; otherwise, this rule of thumb worked reasonably well.

No longer. There are penalties to these forms even if there are no taxes due or all taxes have been reported.  Congress has taken umbrage on Americans having assets overseas. I am at a loss why a married couple (say my wife and I) would draw Congress’ attention solely by having $100,000 overseas. That is not enough money to get a starring role next to Michael Douglas in Wall Street II. It is not enough money to get me invited to a White House dinner, and certainly not enough to join a presidential vacation.

If you are even close to the dollar limits, please see a professional. Do not fool around with this, as the penalties can be severe.

How Could I Live Without Filing Taxes?

Status of the Payroll Tax Cut

The Senate today approved a two-month extension of the employee Social Security tax cut.

You will recall that the employee FICA rate was cut from 7.65 to 5.65 percent, but only for 2011. The FICA tax is composed of two parts: a social security tax of 6.2 percent and a Medicare tax of 1.45 percent. Together they add-up to 7.65 percent and are referred to as FICA. The social security portion was reduced in 2011 by 2 points – from 6.2 to 4.2 percent. It is this portion that we are discussing.

A number of economic and financial commentators have pointed out that 2011 economic growth has been roughly equivalent to this payroll tax cut.  Add to the mix an upcoming election year and the issue of extending the cut has become quite electric.

The bill will next go to the House, where there has been some activism to cut the tax for all of 2012, not just two months.

The President has indicated his intention to sign the bill when it arrives.

My take?

Payroll is reported to the IRS on a quarterly basis. The first quarter is January through March. Accountants and payroll services now have to subdivide the quarter to determine which tax rate to apply to the payroll. Would it have been that difficult - especially since nothing has been accomplished anyway – to have the payroll tax cut run the full quarter?

The Honeymooners Income Tax Episode