Managing Your Money

Tax Provisions in the Jobs Act

On Monday, the White House sent a bill to Congress entitled the “American Jobs Act of 2011”. The bill is some 155 pages long and the White House estimates that it will cost the US Treasury some $447 billion. The White House also proposed some not so serious ways to pay for the bill (discussed below). The bill includes two significant tax cuts and other stimulus spending. The following outlines some of the significant tax items that I saw by perusing through the bill:

Tax Cuts:

Section 101 - Payroll tax cut for employees, employers and the self-employed: The proposed bill extends and reduces the amount of Social Security taxes paid by employees from the normal 6.2 percent to 3.1 percent. The proposed bill would also cut an employers’ portion of Social Security payroll taxes in half, from 6.2 percent to 3.1 percent. This reduction in payroll tax would be eligible for the fist $5 million in payroll paid by an employer. This reduction in payroll taxes is for 2012 only and ends effective January 1, 2013. It appears that self-employment taxes would also be cut in half for sole proprietors and partners.

Section 102 - Tax credit for increasing payroll: Companies will receive a tax credit for any payroll taxes paid for hiring additional employees or for increasing the pay of existing employees. For example, a company has total annual payroll expenses of $2 million. During the subsequent year, they increase wages and hire additional employees, such that their annual payroll increases to $2.4 million. The company will receive a tax credit for any Social Security payroll taxes paid on the additional $400,000 in payroll. This provision is in effect for the period October 1, 2011 through December 31, 2012. This tax credit applies to $50 million of payroll increases. Total estimated cost of Section 101 and 102 is estimated at $240 billion according to the White House.

Section 111 – Extension of bonus depreciation: Companies are allowed to depreciate 100 percent of assets acquired in 2011. The bill proposes to extend the bonus depreciation rules by one year, through 2012. Total estimated cost to the Treasury is $5 billion.

Section 201 – Veterans tax credit: Employers are offered a tax credit for hiring returning veterans. The tax credit is up to $5,600 for hiring a veteran that have been unemployed for six months. For soldiers returning home with service connected disabilities, the tax credit is up to $9,600.

Tax Increases:

The President’s proposal includes numerous tax increases to offset the costs of the bill. These are not serious proposals. Congress has already rejected most of these proposals during last years negotiations over extending the Bush tax cuts and more recently during the debt increase. Congress never really gave the tax increases much thought, so they are not worth much of your time in consideration. Briefly, here are the proposals:

Subtitle A - Limit certain itemized deductions: For families with income over $250,000, the bill will cap the value of an itemized deduction at 28 cents for each dollar deducted. Under current law, itemized deductions can be worth up to 35 cents for every dollar deducted. It appears that this does not apply to interest expense (although I am not 100% sure). Thus, it will primarily target charitable contributions.

Subtitle B - Carried interest: Certain income earned by hedge funds and investment partnerships is treated as capital gain income, which is currently taxed at 15 percent. The President has proposed treating this as ordinary income, which is currently taxed at 35 percent.

Subtitle C - Corporate jets: Corporate jets will be subject to longer depreciation life (seven years) than is currently allowed (five years). The White House estimates this would increase taxes by $300 million per year. A pretty nominal amount for the US Treasury.

Subtitle D - Oil and gas industry: The proposal would reduce credits and allowances used by the oil and tax industry in determining its taxable income.

Subtitle E – Foreign tax payers: The proposal changes the rules on taxation of foreign income.

Subtitle F – Increased target for Joint Select Committee on deficit reduction: This is the saddest part of the proposal. It tells the new Joint Select Committee increase their ten year deficit reduction from $1,500,000,000,000 to $1,950,000,000,000. So the President tells us his bill is paid for and then tells the Joint Select Committee to find a way to pay for it. As I noted, this is not a serious proposal, but an election talking point. Some parts might pass, but most will not get through Congress.

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