Even though Congress passed a tax package that protects most Americans from an income tax increase, the legislation didn’t prevent the expiration of the reduction in Social Security payroll tax, which has been in effect since 2011.
Social Security is funded by a 12.4% tax on wages up to $113,700, with employers paying 50% and employees paying the other half. Congress reduced the share paid by employees from 6.2% to 4.2% for both 2011 and 2012, which saved many families around $1,000 each year.
However, Democrats and Republicans were in agreement to not extend the reduction into 2013. So what does that mean?
The Tax Policy Center says that approximately 77% of American households will be paying higher federal taxes. They estimate that households making $40,000–$50,000 annually will face an average tax increase of $579, while those making $50,000–$75,000 will experience an average tax increase of $822.
I don’t know about you, but having an extra $600–$900 suddenly slip through a hole in my pocket is a little tough to swallow. And, even though Congress averted the fiscal cliff, they will have to address more than $100 billion in government spending cuts by March of this year.
With many people juggling mortgages, student loans, groceries, utilities and more, how will the increase in Social Security payroll tax affect you?