The social security payroll tax cut that many Americans have enjoyed the past two years is set to expire on December 31, 2012. Lawmakers and the President appear to be in agreement with letting the payroll tax cut expire and focusing on extending the Bush tax cuts. What will this mean for your paycheck?
The payroll tax
In 2011, lawmakers reached an agreement to reduce the social security tax from 6.2% to 4.2% for all wages earned up to $106,800. This means that an individual earning $100,000, has had $2,000 (2%*$100,000) in additional annual income as compared to 2010 or $75 more in each biweekly paycheck. This tax cut is not one of those obscure breaks that only impacts a small portion of the population. In fact, 122 million taxpayers have benefited from the additional tax savings.
What will happen next year?
The social security tax is set to increase from 4.2% to 6.2% in 2013. There’s quiet agreement among Congress and the White House that they are going to just let this tax cut expire. They’d rather focus their efforts on the ordinary income, dividend and capital gains tax cuts (i.e Bush tax cuts) which are set to rise starting in 2013 as the potential impact will be far greater.
The silver lining here is that while Americans will have more taxes taken out of their biweekly paychecks, those funds will be going into the dwindling social security trust fund. This is important because the social security trust fund is scheduled to become insufficient by 2033 or in roughly 20 years. This means that workers under the age of 42 aren’t expected to receive the full social benefits due to them. Rather, they will be lucky if they get 75% of their benefits.
What does this mean for me?
The average family earning $50,000 will have $40 less in their biweekly paychecks starting in 2013. This means many taxpayers will need to re-evaluate their annual budget as they likely allocated more money towards gas, groceries, 401(k) contributions and other areas when this payroll tax cut went into effect in 2011.
More Questions? Browse Answers or ask your social security tax questions online.
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