Fight Over Payroll Tax Cut Begins Anew for Congress

Other tax issues loom as Congress gears up for a presidential election year

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As lawmakers return to Washington this week and next, top on their agenda will be to start hashing out a full-year deal to extend the two-month payroll tax cut that was approved before the holiday recess and that expires on Feb. 29.

The Temporary Payroll Tax Cut Continuation Act of 2011 extends the two-percentage-point payroll tax cut for employees, continuing the reduction of the Social Security tax withholding rate from 6.2% to 4.2%.

Sen. Harry ReidSenate Majority Leader Harry Reid (right), D-Nev., said in an interview on NBC’s Meet the Press on Sunday that “the number one goal, and I hope the Republicans have learned a lesson, [is] extending the payroll tax. That was a disaster for [Republicans]. Can you imagine Republicans ... were opposed to lowering taxes?” Added Reid: “So I would hope that they understand that everything doesn’t have to be a fight.”

But Sen. Michael Crapo, R-Idaho, remarked in late December when he was named by Senate Republican Leader Mitch McConnell, R-Ky., to a conference committee responsible for striking a payroll tax cut deal, that “These deliberations will be neither easy nor quick.” The conference committee will also address extending unemployment insurance benefits.

Rep. Steny Hoyer, D-Md., said on Tuesday, however, that he is “very hopeful” that Congress can pass a payroll tax cut extenstion for the remainder of 2012 before the end of February.

Other tax-related issues must get ironed out this year, and even advisors aren’t very optimistic that Republicans and Democrats can get along before the Nov. 6 presidential election.

Leon LaBrecque, an estate-planning attorney and wealth manager with LJPR advisory firm in Troy, Mich., notes a number of crucial tax issues that are looming.

First are the Bush tax cuts, which expire at year-end. LaBrecque says that as it stands now the expiration of these tax cuts is not being “taken seriously,” but it should be. “Expiration of the cuts raises taxes on virtually every taxpayer, changes the rates on dividends to ordinary income, raises capital gain rates, brings back the marriage penalty, eliminates the child tax credit and raises the Alternative Minimum Tax (AMT).” Plus, he says, “Roth conversion and municipal bond purchases will become more useful as the yearend deadline ticks away.”

Also looming is the failure of the congressional supercommittee to act by January 2013 on a debt ceiling deal, which will cause an across-the-board cut in federal spending, LaBrecque says.  Also, the debt ceiling expires again in 2013. “Remember the fun we had in August of 2011?”

And for upper-income folks, the Unearned Income Medicare Contribution starts in 2013. The UIMC adds a 3.8% additional tax on upper-income individuals (over $200K on single and $250K on married) on all unearned income, like dividends, interest, and capital gains,” LaBrecque explains.

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