Pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011 (or H.R. 3765), American taxpayers will receive continued tax relief in the form of lower Social Security tax withholding for the first two months of 2012. This is an extension of a temporary tax law that was in effect throughout 2011.
The Confusing “Recapture” Provision
The extension bill, however, includes a confusing provision about the implementation of the tax break with regard to higher income taxpayers. Furthermore, IRS Newswire Issue Number IR-2011-124, included an equally confusing explanation of the ”recapture” provision included in the extender bill. This is how it reads:
“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).”
What the heck?!! I read tax laws all the time, but even I thought this explanation was especially confusing. It sounds like high income taxpayers have to pay a 2% penalty on any income over $110,100 for the year. But that doesn’t make sense unless that’s how Congress expects to fund the tax break for everyone else. That paragraph was worded so oddly, I had to go elsewhere for further clarification.
Luckily, I found an explanation on the Journal of Accountancy website (a reputable source of information) that matches my own interpretation. So, in plain terms, here is what I think that confusing paragraph above really says, along with background info to put it all in perspective.
2012 Social Security Income Cap and the Recapture Provision
A little background: United States Social Security taxes are only imposed up to a certain level of income. For 2012, the cap is $110,100. This means that Americans only pay Social Security taxes on income up to $110,100 in 2012.
Knowing that, the “recapture” provision must be Congress’ way of saying “anyone who makes over $110,100 per year (or $18,350 over the course of two months) doesn’t get a Social Security tax cut on wages exceeding those amounts because they wouldn’t have to pay Social Security taxes on the excess anyway.” In other words, high income taxpayers must pay back any excess benefit received due to the payroll tax cut.
According to the Journal of Accountancy, the law was written this way to keep things simple for employers – they simply apply the tax cut across the board and the burden of reimbursing the federal government for any excess tax benefit falls on the high income employees’ shoulders. It actually seems more complicated to me this way, but I have never been asked to draft a tax bill before. ;)
Sources:
- Congress Passes Temporary Payroll Tax Cut Extension. Retrieved from journalofaccountancy.com on December 24, 2011.
- Payroll Tax Cut Temporarily Extended into 2012 (IR-2011-124). Retrieved from irs.gov on December 23, 2011.
- The Temporary Payroll Tax Cut Continuation Act of 2011 (H.R. 3765).
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