Why your next paycheck will be smaller
Middle-class taxpayers avoided an income tax increase in the fiscal cliff budget deal, but the Social Security payroll tax will be higher for everyone.
Now that the fiscal cliff is in the rearview mirror with a deal that raises income and investment taxes on the wealthiest Americans, there's one tax hike that most U.S. workers will not escape.
On the final day of 2012, the payroll tax for Social Security reverted to its normal rate of 6.2% -- up from the 4.2% it's been since 2011. The tax had been temporarily reduced to give U.S. households extra spending money to help stimulate the economy.
For a household grossing $50,000 a year, the return to the old level will cut take-home pay by $1,000 a year, or $19 a week. For someone making $30,000 in pretax income, the higher tax means $600 less a year.
Extending the payroll tax holiday wasn't even part of the discussion as Congress narrowly avoided the fiscal cliff with a deal that raises income and investment taxes on those making $400,000 a year ($450,000 for couples).
However, by allowing Social Security taxes to return to their previous level, Congress can't say the middle class was spared.
"It's a huge hit," Joel Naroff, president of Naroff Economic Advisors, told The Associated Press. "It hits people whether they're making $10,000 or they're making $2 million. It doesn't matter who you are . . . . The lower your income, the more of your income you're (spending). So if your taxes go up, it's going to come out of your spending."
The Washington Post says this will be the first tax increase nearly half of Americans have seen in their paychecks (other than when your income grows and you move into a higher tax bracket).
The Post added:
"'We haven't seen broad-based individual tax increases at the federal level in the last 30 years,' said Owen Zidar, an economist at the University of California. 'In the 1960s through the 1980s, payroll tax increases affected most taxpayers, but the vast majority of broad-based tax changes have been cuts rather than increases.'"
On the other hand, Social Security has to be funded. That money normally comes from a 12.4% payroll tax, half paid by you and half by your employer. Only employees got the reduced 4.2% rate over the past two years.
The estimated $215 billion workers didn't pay to Social Security for 2011-12 was replaced with money borrowed by the federal government, which added to the national debt.
Will the economy suffer because the tax holiday expired? Maybe. Maybe not. Says the Post:
"Economists say the expiration of the tax cut will be a major drag on the economy this year. Estimates suggest it could cost between 500,000 and 1 million jobs, leaving the unemployment about 0.4 percentage points higher than it otherwise would be."
However, Joseph Rosenberg, a research associate at the Urban/Brookings Tax Policy Center, told American Public Media's Marketplace that if the Bush tax cuts are extended (and they were for the vast majority of folks), "then the impact of the expiration of the payroll tax is not likely to have a significant economic impact."
It is the wealthy who will be seeing the biggest tax increase as a result of the fiscal cliff deal. Says the AP:
"For 2013, households making between $500,000 and $1 million would get an average tax increase of $14,812, according to the Tax Policy Center analysis. Households making more than $1 million would get an average tax increase of $170,341."
Will you miss the extra $19 or so a week you took home during the payroll tax holiday?
More on MSN Money:
Why not have all the politicians contribute to the fund like all the Americans they represent. Maybe then we all would not have to take the 2% hit in our paychecks.
All you guys have fallen for it once more.
the media and government has hade you focus on this small cliff while all the time raising cost of your goods you need to eat and get to work with.
Hell 20 % out of your pay checks want cover taxes you pay for food and fuel.
your talking 20 bucks a week when fuel and gas just cost you another 150 bucks a week.
come on people
My daughter took the 2% savings last year and applied it as extra princ. to her 185k mortgage. In her case it was about $20 a week or $80 per month applied to princ. only. If she could keep doing this it would save her $22k in interest and take 4.4 years of the loan.
If I had a mortgage I would have done the same.....Yep, I am pretty sure my family can generate a much better return on 2% of income then the ss admin doops.
My advice to all the rest of the working class, get out of debt before it's too late. Pay off those cards, take your money out of the banks (your only getting a measly 1% anyway) and stash it at home somewhere. Don't give the US government another foothold.
Two things should have been done differently with this deal, or non deal. Either restrict drawing Social security benefits after a certain income amount is attained, or as an option to those greedy pukes who will say, :If i pay into it, i deserve to draw it out", Just raise the rates back to 6.2% on those earners making over 400K. Any tax increases, SSI or whatever, should have been borne by those in the upper income brackets. This is not relief for the middle class. This was a slimy back-handed giveaway to the Repubs for Okaying the rotten deal in the first place. No-one earning under 250K should be seeing increases in anything, quite the opposite, we should be seeing reductions to help us stimulate the economy. Despite what the elitists will say, The middle class drives our economy, not small, big or any other business. It's people spending that do the most to stimulate the economy. So this means most will have at least $30-$40 less to spend each week. Thanks, Congress, Senate and Obama. Let me be the first today to say you all suck.
About the Bush tax cut extension: For once, in 30 years, our federal tax burden has been shifted a tiny bit toward the super wealthy. The middle class got the tax cuts extended - permanently - which means that these tax rates are Obama's tax rates, yet raising our tax revenue by ending the tax cuts to the 1%. This means, decreasing the debt.
The GOP delayed the spending cuts, so they can use the coming debt ceiling as a leverage to get the cuts they (the 1%) want (privatize (ruin) our SS and MC).
Obama don't turn your back to GOP - and thank you Obama for being the voice of the 99%
All self imposed problems by our so called concerned politicians. Once again they save the middle class with there excellent work on the fiscal cliff deal.
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