Jan 17 Paycheck a little lighter this month? Despite the extension of the payroll tax cut, taxes are still taking a bigger slice of many workers' pay in 2012. And 2013 could be even worse.
Thanks to little-known factors such as lower transit and childcare benefits, some workers can expect to have their net pay decrease by several hundred dollars this year as new federal regulations rolled out January 1.
"Unless a company is willing to bump up salaries to offset it, taking away a tax advantage or [fringe] benefit will always impact employees at the margins," says Steve Wojcik, vice president for public policy at the National Business Group on Health, a coalition of 325 large employers. "That's probably what many workers are feeling right now."
PRE-TAX PUBLIC TRANSIT ALLOWANCE DROP
Carrie Hughes, who commutes three hours roundtrip from New York City to her office in Princeton, New Jersey, is feeling the pinch. In 2011, Hughes was eligible for a pre-tax public transit payroll deduction of $230 per month. This year failure by Congress to renew that credit let the allowance drop to $125, while those who commute by car can still put aside $240.
"Congress is incentivizing commuters to hit the road, take their car to work," says Bruce Elliott, manager of compensation and benefits at the Society of Human Resource Management. "And if you don't have a car, this is going to cost you a lot of money."
Hughes already paid $5,496 annually for her train pass in 2011, but with the lower pre-tax deduction this year, commuters with incomes of $50,000 or more may pay an additional $400 in taxes.
BACK-UP CHILDCARE BENEFITS NOW TAXES
Several companies are also for the first time this year reporting emergency back-up childcare's "fair market value" as taxable income to the IRS. This change, in some cases, may be due to economic circumstances, but another impetus is likely the phasing out by year's end of a 25 percent tax credit (up to $150,000).
This credit was given to businesses for qualified childcare expenses and enacted by the Bush Administration tax cuts in 2001. So, while employers may have once picked up the tab on such benefits, they are now passing along the tax burden - which can be as much as $50 every time the back-up service is used - to employees.
Employees, however, may be able to offset at least some of these new taxes. Families, depending on their income, can claim up to $3,000 per year in dependent care expenses for one child or dependent, and $6,000 for two, on federal income tax forms. Or, working parents can arrange with their employer to exclude up to $5,000 from their salary pre-tax for childcare expenses.
Which option is more favorable - and whether employer-provider childcare qualifies - varies. "It depends on income, the number of children and what other expenses a family may have," says Eric Namee, a tax accountant based in Wichita, Kansas, who specializes in employee benefits. "With many complicated calculations, it is best to speak to a tax professional."
Either way, employers may soon find the new tax burden of the emergency childcare option will result in increased absenteeism among staff that used the benefit when it was tax-free. A 2007 survey by the firm Workplace Options found that 59 percent of employees or their spouses missed three to 10 days of work in the last year due to a lack of adequate back-up child or elder care.
"It's really not an added benefit anymore," says Alex Abrahms, a father of two who works for a large New York City financial firm, which began adding the cost of back-up child care to employees' paychecks as income January 1. "I'll probably just take a sick day going forward."
Parents in specific states may see other tax credits disappearing in 2012. In Oklahoma, for instance, a state task force on tax reform has recommended the elimination of 47 separate tax breaks, including the state's childcare income tax credit that was claimed on some 362,000 returns in 2010.
"Our young families need that the most," Kathy Cronemiller, president of the Oklahoma Child Care Association told newspaper The Oklahoman. "It's almost like we're setting them up to fail if we don't help them with the childcare tax credit."
LOWER FLEXIBLE SPENDING ACCOUNT LIMITS IN 2013
Flexible spending account limits aren't changing in 2012 - with no government-mandated limit currently in place, most companies allow employees to set aside as much as $5,000 per year. New federal regulations, however, will set a cap at $2,500 in 2013. So employees putting away funds for a costly elective medical procedure not covered by insurance should be sure to schedule it before December 31.
Indeed, 2013 could bring many more unexpected changes for middle-class taxpayers. The personal exemption, which allows all taxpayers to reduce their taxable income by $3,750, is set to expire. And several tax credits that were part of the Obama Administration's economic stimulus will also disappear. For example, the child tax credit will shrink from $1,000 per child to $500, and the higher income limits to qualify for the Earned Income Tax Credit will end.
Of course, it is still possible that Congress could act to restore many, if not all, of these expiring tax breaks. Whether that will happen remains unclear, but as Wojcik puts it, "You'd hope in this economic climate, Congress would be doing everything in its power to help workers and their families, not make things more difficult."
In the meantime, workers impacted like Hughes and Abrahms are left with few options. "I have a job I like in New Jersey, a partner in New York, and an economy that isn't bursting with other great jobs," Hughes says. "So I'm not even going to figure out how much I lose in this, but just seethe quietly."
The author is a Reuters contributor. The opinions expressed are her own. (Editing by Jilian Mincer and Beth Pinsker Gladstone)