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Congress Passes Payroll Tax Cut Extension
Last Friday, the House of Representatives and the Senate both passed a bill that will extend the reduced 4.2% Social Security tax rate through the end of the year (The Middle Class Tax Relief and Job Creation Act of 2012, H.R. 3630). The vote was 293–132 in the House and 60–36 in the Senate. The bill now goes to President Barack Obama, who is expected to sign it quickly.
The employee portion of the Social Security tax was reduced from 6.2% of the first $106,800 of wages to 4.2% for 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. (The employer portion remained at 6.2%.) Under the Temporary Payroll Tax Cut Continuation Act of 2011, P.L. 112-78, enacted Dec. 23, 2011, the 4.2% rate was extended through Feb. 29, 2012. For 2012, that rate applies to the first $110,100 of wages. H.R. 3630 extends the 4.2% rate through the end of 2012. As a result, a recapture provision included in the temporary extension will not take effect. Under that rule, taxpayers with income from employment for January and February that exceeds $18,350 would have been required to recapture the excess benefit they receive. The act also extends certain unemployment benefits and blocks a cut in Medicare payments to doctors. The extension of the payroll tax cut is estimated by the Joint Committee on Taxation staff to cost $93 billion in revenue over the next two years. The act raises revenue through an auction of the spectrum of public airwaves, currently reserved for television, to allow for more wireless Internet systems. The auctions are projected to raise $15 billion. The act also repeals earlier-enacted shifts in the timing of corporate estimated tax payments.
Content provided by the Journal of Accountancy http://www.journalofaccountancy.com/Web/20125176.htm
:: George G. Elkin, Managing Director, Financial & Wealth Services 631.923-1595 ext. 336G. R. Reid Wealth Management Services, LLC How Should I Manage My Retirement Plan?Employer-sponsored retirement plans are more valuable than ever. The money in them grows tax-deferred until it is withdrawn at retirement. Distributions from a tax-deferred retirement plan, such as a 401(k) plan, are taxed as ordinary income and may be subject to an additional 10-percent federal tax penalty if withdrawn prior to age 59 ½. And contributions to a 401(k) plan actually reduce your taxable income. But figuring out how to manage the assets in your retirement plan can be confusing, particularly in times of financial uncertainty.
Conventional wisdom says if you have several years until retirement, you should put the majority of your holdings in stocks. Stocks have historically outperformed other investments over the long term. That has made stocks attractive for staying ahead of inflation. Of course, past performance does not guarantee future results. The stock market has the potential to be extremely volatile. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Is it a safe place for your retirement money? Or should you shift more into a money market fund offering a stable but lower return? And will the instability in the markets affect the investments that the sponsoring insurance company uses to fund its guaranteed interest contract?If you’re participating in an employer-sponsored retirement plan, you probably have the option of shifting the money in your plan from one fund to another. You can reallocate your retirement savings to reflect the changes you see in the marketplace.
Here are a few guidelines to help you make this important decision.
Consider Keeping a Portion in Stocks
- In spite of its volatility, the stock market may still be an appropriate place for your investment dollars — particularly over the long term. And retirement planning is a long-term proposition.
- Since most retirement plans are funded by automatic payroll deductions, they achieve a concept known as dollar cost averaging. Dollar cost averaging can take some of the sting out of a descending market.
- Dollar cost averaging does not ensure a profit or prevent a loss. Such plans involve continuous investments in securities regardless of the fluctuating prices of such securities. You should consider your financial ability to continue making purchases through periods of low price levels. Dollar cost averaging can be an effective way for investors to accumulate shares to help meet long-term goals.
Diversify- Diversification is a basic principle of investing. Spreading your holdings among several different investments (stocks, bonds, etc.) may lessen your potential loss in any one investment.
- Do the same for the assets in your retirement plan.
- Keep in mind, however, that diversification does not guarantee against investment loss; it is a method used to manage investment risk.
Find Out About the Guaranteed Interest Contract- A guaranteed interest contract offers a set rate of return for a specific period of time, and it is typically backed by an insurance company. Generally, these contracts are very safe, but they still depend on the security of the company that issues them.
- If you’re worried, take a look at that company’s rating. The four main insurance company rating agencies are A.M. Best, Moody’s, Standard & Poor’s, and Fitch Ratings. A.M. Best ratings are based on financial conditions and operating performance; Fitch Ratings, Moody’s, and Standard & Poor’s ratings are based on claims-paying ability. You should be able to find copies of these guides at your local library.
Periodically Review Your Plan’s Performance- You are likely to have the chance to shift assets from one fund to another. Use these opportunities to review your plan’s performance. The markets change. You may want to adjust your investments based on your particular situation.
- The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
George Elkin is a Registered Representative offering Securities through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory products/services are offered through American Portfolios Advisors Inc., an SEC Registered Investment Advisor. G.R. Reid Consulting Services, LLC is not a registered investment advisor and is independent of American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. Unless specifically stated otherwise, the written advice in this memorandum or its attachments is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Information is time sensitive, educational in nature, and not intended as investment advice or solicitation of any security.
This material was written and prepared by Emerald.
