Payroll Extension Eliminates Recapture Provision

http://www.futureofcapitalism.com/2012/02/payroll-extension-eliminates-recapture-provision

One of the little-noticed features of December's two-month extension of the payroll tax cut was a "recapture provision" that actually raised the income tax on those earning more that $110,100 a year. As an IRS press release explained it,

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).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year.

I got into this in my article on the payroll tax in the February issue of Commentary, but it didn't attract much attention elsewhere, in part because neither party really wanted to brag about the fact that they were, in essence, taking the payroll tax cut away with one hand from those with income over $110,000 just as they were at the same time taking public political credit for extending it.

I was curious what would happen to this provision in the payroll tax cut extension legislation, so I looked at the text of the bill. Sure enough, there it is:

b) Conforming amendments.—Section 601 of such Act (26 U.S.C. 1401 note) is amended by striking subsections (f) and (g).

These aren't actually "conforming amendments" as the term is usually used in legislation to tidy up language. Subsections (f) and (g) were precisely the sections that added that recapture tax, and striking those subsections not only means the recapture provision won't be extended for the remaining ten months of 2012, but also, at least as I read it, that those who would have owed the tax for January and February now won't have to pay it for those two months, either. If this language striking subsections (f) and (g) survives Congress, it's a significant win for the pro-growth side.

by Ira Stoll  |  Feb 15, 2012 at 9:41 pm Related Topics:  Politics, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list