Every year brings tax changes, but in recent years there have been more changes than usual because the U.S. Congress likes to enact "temporary" tax measures set to expire on a given date. Sometimes these measures are extended, sometimes not.
These days Congress likes to wait until the very last minute (or later) to decide what to do. (No wonder Congress’s approval rating is lower than Paris Hilton’s.)
Two important tax breaks that are set to expire on Dec. 31, 2011, are payroll tax relief and 100 percent bonus depreciation. However, on Dec. 13, the House passed the "Middle Class Tax Relief and Job Creation Act of 2011." Among other things, it extends both of these provisions through 2012.
Payroll and self-employment tax relief
Everyone who works — whether a business owner or an employee — is required to pay Social Security and Medicare taxes. Employees pay one-half of these taxes through payroll deductions; the employer must pony up the other half and send the entire payment to the Internal Revenue Service.
Business owners must pay all of these taxes themselves. Business owners’ Social Security and Medicare contributions are called self-employment taxes.
Ordinarily, self-employment taxes consist of a 12.4 percent Social Security tax on income up to an annual ceiling; however, for 2011 this amount was reduced to 10.4 percent.
In 2011, the annual Social Security ceiling was $106,800. Medicare taxes are not subject to any income ceiling and are levied at a 2.9 percent rate. For 2011, this combined to a total 13.3 percent tax on employment or self-employment income up to the Social Security tax ceiling.
If the 2 percent Social Security tax reduction is not extended to 2012, the Social Security tax will go back to its normal 12.4 percent rate, up to the annual ceiling ($110,100 for 2012). This gives a total tax of 15.3 percent up to the ceiling.
If the 2 percent reduction is extended, taxpayers whose net self-employment income is equal to or greater than the annual ceiling will save $2,202 in Social Security taxes.
100 percent bonus depreciation
The other tax break that is scheduled to expire at the end of 2011 is 100 percent bonus depreciation. This unprecedented measure permits business owners to deduct 100 percent of the costs of all types of tangible personal property they buy for their business in a single year, rather than depreciate it over several years (usually five or seven years).
Moreover, there is no cap on this deduction. If this tax break is not extended to 2012, bonus depreciation will not disappear but it will be reduced to 50 percent of the cost of the asset to be depreciated.
So, is it a sure thing these tax breaks will be extended? No. The Republican-backed bill must now be approved by the Senate, where its chances are uncertain. President Obama has said that he will veto the bill if the Senate passes it without changes.
Many "experts" predict that the Senate will pass an amended version of the bill and then send it back to the House. The amended bill would almost certainly include the 2 percent payroll tax deduction. Whether it will also extend 100 percent bonus depreciation is unclear.