Compliance December 19, 2011

Senate Passes Short-Term Extension of Payroll Tax Cut

The U.S. Senate passed legislation Saturday extending a Social Security payroll tax cut and jobless benefits for just two months.
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The House last week passed an extension of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (see “House Passed Bill for Payroll Tax Cut Extension“), which provides a payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2% to 4.2% of wages paid (see “IRS Releases Pay Withholding Change Guidance“).  

The Associated Press (AP) reports that Democratic and GOP leaders opted for the short-term extension of the payroll tax and jobless benefits measure after failing to agree on big enough spending cuts to pay for a full-year renewal. The $33 billion cost of the $1 trillion-plus catchall budget bill that wraps together the day-to-day budgets for 10 Cabinet departments and military operations in Iraq and Afghanistan would be covered by raising fees on new mortgages backed by Fannie Mae and Freddie Mac.  

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The White House says the fee would increase the monthly cost of a typical $220,000 mortgage by almost $15 a month; over 30 years, the fees would increase the total cost of such a mortgage by more than $5,000, according to the AP. In contrast, a worker making a $100,000 salary would reap a tax cut of about $330 through the two-month extension of the payroll tax cut. A worker with a typical $50,000 salary would get just a $165 tax cut.  

Officials said that in private talks, the two sides had hoped to reach agreement on the full one-year extension of the payroll tax cut and unemployment benefits that Obama had made the centerpiece of the jobs program he submitted to Congress last fall, but those efforts failed when the two sides could not agree on enough offsetting cuts to blunt the measure’s impact on the debt.  

The White House has signaled that President Obama will sign the bill.  

Compliance December 16, 2011

IRS Saver’s Credit Helps Workers Save for Retirement

The Internal Revenue Service (IRS) has issued a reminder for taxpayers to take advantage of the saver's credit for 2011. 
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According to the IRS, the saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply. 

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still receive a credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees and the Thrift Savings Plan for federal employees.  

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The saver’s credit can be claimed by: 

•  Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012; 

•  Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and 

•  Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012. 

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000—$2,000 for married couples—the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers. 

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly. 

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn. 

Other special rules that apply to the saver’s credit include the following: 

•  Eligible taxpayers must be at least 18 years of age;  

•  Anyone claimed as a dependent on someone else’s return cannot take the credit;  

•  A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a student; and 

•  Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation. 

  

The saver’s credit was started in 2002 as a temporary provision. It was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annualy to keep pace with inflation. For more information on the credit, visit www.IRS.gov.  

 

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