How the Tax Relief Act of 2010 Will Impact Your Paycheck

On December 17, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, also known as the Tax Relief Act of 2010 or TRA 2010, which extended the Bush-era tax rates for two more years.


Of the many included tax extensions and changes, there are a few that could have a direct impact to your paycheck and are outlined below.


• Temporary Reduction in the Employee Social Security Tax Rate – Prior to 2011, the employee social security tax (officially known as Old Age, Survivors, and Disability Insurance or OASDI) withholding rate was 6.2% on the first $106,800 of wages for those employees subject to social security taxes. TRA 2010 provides that employees will pay 2% less in social security tax in 2011. This means that employees subject to social security taxes will pay only 4.2% on wages up to the $106,800 wage base in 2011. Most student employees and those that participate in the Temporary Employee Retirement Plan (TERP) will not be affected by the tax rate reduction as they are not subject to social security taxes.


Note: The Federal Old-Age and Survivors Trust Fund, the Federal Disability Insurance Trust Fund, and the Social Security Equivalent Benefit Account will receive transfers from the General Fund of the United States Treasury equal to any reduction in payroll taxes attributable to this rate reduction. The tax rate reduction will not affect an individual’s participation in or the amount of future eligible social security benefits.


• Federal Withholding Tax Rates – The current tax brackets (10%, 15%, 25%, 28%, 33% and 35%) were extended for two years instead of reverting back to the previous brackets (15%, 28%, 31%, 36% and 39.6%). The 2010 withholding tax tables also incorporated the Making Work Pay Credit ($400 for single individuals with less than $75,000 in adjusted gross income and $800 for married couples with less than $150,000 in adjusted gross income). The extension of the tax brackets did not include the Making Work Pay Credit so federal withholding tax amounts will increase in 2011 pay checks for those individuals that previously received the credit.


• Elimination of Advance Earned Income Credit (AEIC) – While the Earned Income Tax Credit (EITC) will still be in effect, the tax changes eliminate the provision for advanced payments of the credit in paychecks. Individuals who qualify for the EITC will have to wait until they file their 2011 personal income tax return in 2012 to receive this tax credit. The net result of these tax changes could affect your take home pay positively or negatively based on your individual situation which includes your filing status, number of exemptions claimed, tax exemption status and income.


Some of the other tax extensions that were included in TRA 2010 that do not directly affect your paycheck but may be of interest to you include:


• Employer-provided non-job-related educational assistance – TRA 2010 extended the Section 127 exclusion of up to $5,250 per year for employer provided non-job-related educational assistance. This extension will allow the USF Employee Tuition Program to continue to offer tuition exemption for qualified graduate courses that would otherwise be taxable to the employee.


• Child Tax Credit – Generally, taxpayers with income below certain threshold amounts may claim the $1,000 child tax credit to reduce federal income tax for each qualifying child under the age of 17.


• Marriage penalty relief – This relief reduced the tax burden on married couples by setting their standard deduction to exactly twice that of a single person and setting the amount of income subject to the 10% and 15% tax rates to exactly twice that of a single person.


• Dependent Care Credit – The expanded dependent care credit is also continued by the TRA 2010 which allows a taxpayer a credit for an applicable percentage of child care expenses for children under 13 and disabled dependents.