When President Obama and Congress finally came to an agreement on the new tax package on New Year’s Day, preventing the fiscal cliff scenario that would have let certain tax breaks expire, many Americans breathed a sigh of relief.
One piece of business was left on the table to expire though – a Social Security payroll tax reduction. That means many people will still see an increase in their taxes this year, to the tune of about $600 for a household with an annual income between $40,000 and $50,000, according to the Tax Policy Center. Families making between $50,000 and $75,000 will pay an average of $822 extra this year.
For the past two years the payroll tax rate for Social Security was reduced from 6.2% to 4.2% to stimulate spending. President Obama pushed to keep the rate reduction but was unable to come to an agreement with Congress and let it expire.
Bush-era tax cuts protected
Most of the tax cuts implemented by Obama’s predecessor were saved by the tax deal, extending the reduction of investment and estate taxes and tax credits for working families, including the $1,000-per-child tax credit.
Households making less than $400,000 likely won’t see their taxes rise as a result of the new tax code – except when it comes to the Social Security tax. President Obama said that the deal “protects 98% of Americans and 97% of small-business owners from a middle-class tax hike
Budgeting for tax hike
Families and individuals facing a higher Social Security tax will need to prepare for the impact to their bottom lines. Putting away some money now for tax time is a good idea, according to a spokesperson for the National Foundation for Credit Counseling (NFCC). “If a person was fortunate enough to have received a pay raise, it’s likely that this Social Security tax increase will wipe out most of it.”