While Congress passed a tax package just in time to avoid many of the most feared “fiscal cliff” pitfalls, most Americans may still be scrutinizing their payroll check stubs in the coming weeks after reading that paychecks took a hit.
Social security taxes will climb two percent, representing a $1,000 hike for a worker making $50,000 a year and $500 for those making $25,000 annually. The increase is because the New Year’s deal reached by federal leaders did not extend a temporary two percent reduction in Social Security taxes. The result is a two percent increase in Social Security taxes for nearly everyone.
Social Security is funded with a 12.4 percent wage tax for incomes up to $113,700, and employers have in the past split the bill evenly with employees. While the employer contribution remained the same, Congress lowered the percentage paid by employees for 2011 and 2012 from 6.2 percent to 4.2 percent. Now, that tax rate will return to the 6.2 percent figure.
Aside from the Social Security tax increase, the New Year’s finance deal did protect most individuals making less than $400,000 and families making less than $450,000 from additional tax increases that would have come as a result of the expiration of Bush-era tax cuts. The tax cuts, enacted by former President George W. Bush, lowered taxes for households at every income level, while also reducing investment and estate taxes and increasing a number of tax credits.