Congress Extends Expiring Tax Cuts; Cuts Payroll Taxes for Employees (1/11)

Last year's congress extended the Bush-era tax cuts and created a new payroll tax break for employees.  Find out how three of the tax provisions will affect your workplace.

After several weeks of rancorous debate and high level discussions between the White House and Republican leaders, Congress finally passed a package to extend the Bush-era tax cuts originally passed in 2001.  Last month, the lame duck Congress passed H.R. 4853, the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Relief Act”), and President Obama signed it into law on December 17, 2010.  Among other things, the Act ensures that individual’s tax brackets and capital gains and dividend tax rates remain at the same levels as 2010 for at least two more years.  It also includes an estate tax provision that imposes a 35% tax on estates of $5 million or more and extends unemployment benefits under the federal emergency unemployment compensation program until 2012, which allows certain long-term unemployed workers to receive up to 99 weeks of benefits in states with high unemployment rates.        In addition to these extensions of individual tax rates from the Bush era, the Act contains several provisions that affect your workplace.  Specifically, the Act extends nonjob-related education assistance and parity provisions for qualified transportation fringe benefits and cuts payroll taxes for employees for one year.  Below is a discussion of these tax provisions. History of the Tax Cut Extensions Under President Bush, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in June of 2001 and lowered individual tax rates to provide economic incentives to work and invest and to stimulate economic growth.  The EGTRRA also included provisions encouraging retirement and education savings.  Most of the provisions were phased in over several years and were scheduled to “sunset,” or expire, on December 31, 2010, in order to prevent the bill from triggering “PAYGO” requirements that would allow the Senate to block the legislation because it significantly increased federal deficits.      As a result of the sunset provision, individual tax rates would have increased on December 31, 2010, unless new legislation was passed to extend the cuts.  After weeks of debate over the effect of letting the tax rates rise during a recession, Congress finally agreed on a package of extensions allowing the tax rates to remain the same and which also included an extension of unemployment benefits.  The extension is only for two years for most of the taxes, so this debate will happen again in 2012, just in time for the next election cycle.  Provisions Affecting the Workplace Included in this tax package are three provisions that affect your employees directly: 1.     Section 127 educational assistance.  This provision, named for its tax code section  26 U.S.C. §127, allows employees to exclude from their income up to $5,250 a year in educational assistance that is not directly job-related and applies to both undergraduate and graduate work.  In order for the exclusion to apply, employers must have a separate, written plan for education assistance that does not discriminate in favor of highly compensated employees.  In addition, employers must not exceed specific limits on assistance to owners, their spouses, or dependents.  Section 127 was originally passed in 1978 as a temporary tax measure.  Since then, it has expired and been extended repeatedly, creating administrative problems in the years when it was retroactively reinstated.   In some years, the exclusion applied only to undergraduate course work and excluded graduate level courses.  However, the EGTRRA amended Section 127 to extend the exclusion for employer-provided educational assistance to graduate courses and made “permanent” the exclusion as applied to both undergraduate and graduate education, but it was still due to expire December 31, 2010, because of the EGTRRA sunset provision.  Now, Section 127 has been extended for two years until December 31, 2012, by the 2010 Tax Relief Act. 2.     Parity for qualified transportation fringe benefits.  Under the tax code, employers may exclude from their employees’ taxable income employer-provided “qualified transportation fringe benefits” up to a specified dollar amount that covers qualified parking, certain transit passes, and commuter transportation in commuter highway vehicles.  Under the 2009 American Recovery and Reinvestment Act (ARRA), employers could exclude the same amount from an employee’s taxable income for transit passes and transportation by commuter highway vehicles as they do for qualified parking.  This parity between the two benefits was set to expire on December 31, 2010, under the ARRA, but was extended for one more year until December 31, 2011, by the 2010 Tax Relief Act.  The amount is currently $230 a month for all three qualified transportation fringe benefits, but could be increased by the IRS. 3.     Decrease in employee payroll taxes.  The 2010 Tax Relief Act also contains a payroll tax cut just for employees.  Specifically, employees will enjoy a one-year reduction in their Social Security payroll taxes from the current rate of 6.2% to 4.2% for 2011.  Currently, the Social Security tax applies to all income up to $106,800.  Employers, however, still must pay their rate of 6.2%.