Photo by James Manners on flickr.com
Do you make over $110,100 per year? If so, then you need to read and understand this.
That 2% payroll tax cut that Congress extended for January and February – did you know that if you make over $18,350 for those two months that you will have to pay back a 2% surcharge on that income next year at tax time?
Now I keep hearing, “Don’t worry, Congress will fix that.” But let’s get realistic – how often can you count on Congress to “fix” anything these days?
I think the biggest problem is that this got passed and most people don’t have a clue that they could have a very real problem when they file their taxes next year.
Let me give you an example. Let’s say that Fred Taxpayer earns $250,000 a year in W2 wages from his law firm. That works out to $41,667 for the 2 month period. 41,667 minus 18,350 equals $23,317. Fred is going to be taxed an extra 2% on that $23,317. Fred can’t take any deductions to write off against this tax, no tax credits or offsets. It’s just a straight 2% on the $23,317.
Now I hear what some of you are saying – that’s only $466 and if Fred already makes $250,000 a year you’re not feeling too sorry for him. The point is that it’s a stealth tax, shoved under the rug and not discussed openly. Surprise, Fred! Here’s an extra $466 you have to spend on taxes that no one told you about.
But for some folks, it’s even worse. Let’s say Fred gets his annual bonus in January. Fred did a really good job and got a $50,000 bonus from the firm. There’s another $1000 added to Fred’s tax bill. Remember, there are no deductions or tax credits to offset this tax. And, this is tax money that is in addition to the regular income tax he’s already going to have to pay.
If you’re a high wage earner, be aware that this is happening. Put the extra 2% that you’re theoretically saving and plug it into a savings account because you’ll have to pay part of it back later.
Oh, and for what it’s worth, the rank and file House and Senate salary is $174,000 a year. That means they’ll pay an extra $213. Most members of Congress don’t prepare their own taxes because “our tax system is too complicated.” I wouldn’t be surprised if some of them don’t even realize that they voted for this.
If you’d like something to back up my story, here’s a link to the IRS website outlining the new rules: http://www.irs.gov/newsroom/article/0,,id=251650,00.html
Okay, the day isn’t even half over and I’ve already taken guff for poor Fred’s $466 tax bill. Let me point out that the $466 is in addition to the $6808 that he’s already had to pay on that money and that’s not including any state income tax.
And as far as the bonus goes,iIf Fred got that $50,000 payment in December (last year or this year–doesn’t matter) there’d be no additional tax on it. He’d still pay tax of course, just not the bonus 2%.