With the last minute agreement to extend the 4.2% individual social security tax rate into 2012, we now can start looking at planning our tax situations for 2012.

Well, sort of.

We have our individual income tax rates set, we know our state tax rates, but by only extending the social security tax cut for 2 months, Congress has made it harder for us to plan. We don’t really know whether we can count on that 2% tax savings for the entire year or if our paychecks will become a little bit smaller come March 1st.

Originally, having the tax rate go back to 6.2% would have meant an increase of $2,340 for those who make $110,100 or more.

With a 2 month guaranteed tax break, if Congress really can’t agree on an agreement for the other 10 months of 2012 and the social security tax rate does indeed increase to 6.2%, that will cost taxpayers who make $110,100 or more a total of $1,950. That is not a small sum at all!

However, I do believe that since both Democrats and Republicans have shown indications that they want to extend the tax break through the end of 2012, and while I have no idea how they’ll come to an agreement, I do think that we will see the social security tax rate remain at 4.2% through the end of the year.

While I don’t advocate spending the money before you have it, I think it’s safe to calculate the savings over the course of the year. Maybe that will be extra savings that you can put toward retirement, or maybe that’s a grand or two that will go toward paying off debt. Either way, use it wisely and enjoy your extra savings in 2012!

We’ll all be paying more social security taxes next year!

No new legislation has been passed, and President Obama is actually trying to reduce the payroll tax to 3.1%. But there are other forces at play here that may result in about 10 million Americans paying more in social security tax.

The news is mixed: Those who receive Social Security benefits will receive 3.6% more next year due to a cost-of-living increase that will go into effect. Inflation has been rising, but the same inflation that affects the amount of social security checks also raises the amount of income that is subject to the Social Security tax, also known as the payroll tax.

Currently, workers pay tax on the first $106,800 of income. But starting in 2012, workers will have to pay the tax on the first $110,100, an increase of $3,300 that will be subject to the tax.

In the past, the 12.4% payroll tax was split between workers and employers, each of which paid 6.2%. For 2011 however, Congress passed a temporary payroll tax holiday which lowered the work portion down 2 percentage points to just 4.2%

There are a few scenarios for how much people could pay, all depending on what happens in the next 2 months.

Currently, people making $110,100 or more pay $4,486 to Social Security taxes.

If the Social Security tax reverts back to 6.2% in 2012, people making $110,100 or more would pay $6,826, a whopping $2,340 more than the previous year.

If the Social Security tax remains at 4.2% in 2012, they would pay $4,642 in Social Security tax, an increase of $139 in 2011.

If Obama has his way and the Social Security tax is lowered to 3.1%, they would pay $3,413 in Social Security tax, a decrease of $1,073.

Of course, this only affects people who make over $106,800. For those that make less than that, all of their wages are subject to the tax, so a decrease down to 3.1% would help everyone while reverting back to 6.2% would hurt everyone.

UPDATE: The 2012 social security tax rate is set, and remains at it’s 2011 level of 4.2%. Yay for more money!

Readers, are you rooting for the payroll tax to be lowered, raised, or stay the same? This is one of the most noticeable taxes we see and our tax bills are directly affected by inflation.