Middle-class taxpayers will be happy to know that President Obama and Congress have agreed to extend the payroll tax cut until the end of 2012.

The payroll tax cut actually reduces the amount of tax that taxpayers pay toward social security. Instead of paying the normal 6.2% tax rate, taxpayers will get a 2% cut and pay only 4.2% of their earnings toward social security.

The Internal Revenue Service today released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

On February 23, the Internal Revenue Service issues a press release that states, “Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted yesterday, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011. This reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted Dec. 23.”

Are you self-employed and feeling left out? Don’t worry there’s good news for you too. According to the same IRS news release “Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4 percent to 10.4 percent. For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.”

The Middle Class Tax Relief and Job Creation Act, also appeals the two-percent recapture tax that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut.

The IRS will continue to provide updates to the newly-extended payroll tax cut through press releases on the IRS website.

The payroll tax cut extension means more money for middle-class taxpayers.

Yes, its true that the Obama tax cuts will reduce income tax rates and Alternative Minimum Tax (AMT). It will also provide tax relief by reducing employee-paid payroll taxes. It’s called the Payroll Tax Holiday.

The Payroll Tax Holiday provides tax relief by reducing the amount of Social Security tax employees pay on wages earned and self-employed individuals pay on all of their self-employment income (up to $106,800) by 2%. Under current law, employees pay a 6.2 percent tax and the self-employed 12.4 percent.

This tax holiday is only temporary however; it provides tax relief for one year. This means that during 2011, employees will pay only 4.2% on wages and self-employed individuals will pay only 10.4% on income in Social Security tax.

So, everyone should be happy, right? Not so fast!

Progressive advocates and many Democrats are concerned that the payroll tax cut will pose a threat to Social Security. Not because they don’t want workers to have extra cash in their pocket, but because they worry the temporary payroll tax rate will become the norm and leave Social Security competing with other programs for funding – and threatening Social Security benefits.

However, several top Republicans maintain they’re not interested in extending the payroll tax cut. Their “gut feeling” is the tax will be allowed to expire as planned.

Although the tax cut is only 2%, it represents a significant tax reduction of 32 percent. For instance, a worker currently earning $100,000 will pay $6,200 in payroll taxes in 2010, and $4,200 in 2011.

Good, tax relief for the working man, right? Nevertheless, consider…

The Congressional Budget Office estimates the cut will reduce federal revenues by $112 billion over the next two years. Because the tax package is not offset by changes elsewhere in the budget, the government will have to borrow to fill that hole in the Social Security trust fund.

Not so good, no relief for our national debt.

Sources: democrats.senate.gov, thehill.com, democraticunderground.com

The new decade is in full swing and before you know it you’ll be filing your federal income taxes. The tax filing deadline for the tax year 2009 is April 15, 2010. The tax changes for 2009 effect Social Security, standard deductions, mileage rate deductions, exemptions and earned income credit.

Lets start out with the Social Security and Medicare tax changes for 2009. The Medicare tax will remain at 1.45% while Social Security remains at 6.2%. The wage limit, or Social Security maximum, has been raised to $106,800 – an increase of $4,800 over last year’s maximum. The rate of increase continues to outpace inflation, or the cost of living increase in wage you might expect from your employer. The maximum Social Security benefit was increased to $2,399 per month in 2009, and the Cost of Living Adjustment (COLA) was 5.8%.

Next are the standard deduction tax changes for 2009. According to the IRS, around two out of every three taxpayers claim the standard deduction on their income tax returns. Once again, the rates that apply to 2009 have increased from their 2008 levels. The standard deductions that apply in 2009 include:

* Single – $5,700
* Married filing separately – $5,700
* Head of household – $8,350
* Married taxpayers filing jointly / qualifying widow(er)s – $11,400
* Married taxpayers filing separately – $5,700

Here are the tax changes for exemptions. The amount you can deduct for each exemption you can claim on your federal income taxes has increased again in 2009. The 2008 value of $3,500 has increased to $3,650 in 2009. That’s a total increase of $250 over the last two years.

The Mileage Deduction Rates have changed for the 2009 tax year 2009. Business miles have been increased to $.55 per mile. Charitable Services will be $.14 per mile and Medical Travel goes up to $.24 per mile.

The maximum earned income credit for low and middle-income workers and working families with two or more children is $5,028 in 2009, up from $4,824 in 2008. The qualifying income limit for the credit for joint return filers with two or more children is $43,415 in 2009, up from $41,646.

This is just an outline of the tax changes for 2009. For complete details visit the irs website. And remember, if you still haven’t filed or paid the tax for previous year(s) federal income tax, consult with a trusted tax attorney or tax lawyer.

source: money-zine.com