Fiscal Cliff: Your Payroll Taxes are going up! (Yes, You)

In 2013, your payroll taxes are going up! One tax provision that was not addressed in the "fiscal cliff deal" was the expiration of the "payroll tax holiday." Under that temporary cut, employee's share of the payroll tax that funds social security was reduced to 4.2% from 6.2%. This cut was not continued.

Therefore, every American wage earning family will find their next paycheck lower. The Wall Street Journal calculates that this will result in additional payroll taxes of $1,000.00 per year for a U.S. family earning $50,000.00 a year.

For additional information on the payroll tax:

Payroll taxes, going up!

Payroll Tax & Social Security: troubling numbers...

2010 Federal Revenue Sources: a surprising amount came from payroll taxes.

Fiscal Cliff Deal: What it means for 2013 taxes!

As you probably already know, the House and Senate have passed a fiscal cliff deal which the President has said that he would sign.

Although in depth analysis is premature (the text of the Senate bill is 157 pages), some key figures are already known. This from the good folks at the Tax Foundation, much more in depth analysis can be found there. Check it out!

Particulars of the Deal from the Tax Foundation:

Income Tax Brackets:

"Retains the 10 percent, 15 percent, 25 percent, and 28 percent income tax brackets from the Bush tax cuts permanently

Retains the 33 percent and 35 percent income tax brackets from the Bush tax cuts for taxable income under $400,000 (single), $425,000 (head of household), and $450,000 (joint filers). Imposes 39.6 percent tax rate on income above this level."

Capital Gains & Dividend Tax:

"Capital gains tax and dividends tax will be 20 percent for taxpayers with income over $400,000 (single) and $450,000 (joint filers). This does not include the new 3.8 percent health care tax on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income, so the top rate for capital gains and dividends will be 23.8 percent. For lower income levels, the tax will be 0 percent, 15 percent, or 18.8 percent."

Estate & Gift Tax

"Raises estate and gift tax to 40 percent, but above the current exemption level (~$5.12 million) and adjusted for inflation in future years"

Alternative Minimum Tax

"Permanently sets Alternative Minimum Tax (AMT) exemption at $50,600 (single) and $78,750 (joint filers) for 2012 and adjusts for inflation thereafter"

Payroll taxes, going up!

The New York Times reports today that the temporary payroll tax holiday (2% point reduction on the employee's share) will likely expire at the end of 2012. This will result in $95 Billion increased tax revenue and reduced working family paychecks.

From the article:

Independent analysts believe that the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as 1 million jobs. That is because the typical American family had $1,000 in additional income from the lower tax.

I have written about payroll taxes before, and you can find those here:

• Medicare's $90 Trillion (with a T!) Unfunded Liability
• Payroll taxes not covering costs of Medicare.
• Payroll tax cut expiration

Medicare’s $90 Trillion Unfunded Liability

According to Michael D. Tanner of the Cato Institute, Medicare's future unfunded liabilities could be as much as $90 trillion (yes that's trillion with a T). For perspective, $90 trillion is greater than worldwide GDP for 2011.

From Tanner's article:

Let's try to put the ongoing debate over the future of Medicare into a little bit of context. Last year, Americans paid $274 billion in Medicare taxes and premiums. At the same time, the program paid out $564 billion in benefits. That amounts to a shortfall of roughly $290 billion. Looking into the future, even the most optimistic estimate by the program's trustees puts Medicare's future unfunded liabilities at more than $38.6 trillion. More realistic projections suggest the shortfall could easily top $90 trillion.

With such astronomical unfunded Medicare liabilities, don't be surprised if politicians start debating whether or not to increase the Medicare tax rate (1.45% for 2012) in the not so distant future.

2% payroll tax cut on track to expire: Per WSJ

The Wall Street Journal reports that both the Republicans and Democrats now appear willing to allow the current temporary payroll tax cut expire at the end of this year. Under the current temporary cut, the employee portion of payroll tax that funds social security is 4.2% and after expiration will revert to 6.2%. Thus, for all American employees, the payroll tax on wages will rise 2% by the end of the year unless the cut is extended.

From the article:

This time, the White House isn't pushing for another extension. "That was always intended to be a temporary measure to support job creation and economic growth," Jason Furman, a top White House economic adviser, said recently. "It's not something that we have at this stage called for extending into next year."

Republicans were unenthusiastic about the tax cut to begin with, preferring instead a broad overhaul of the tax code and contending it would weaken Social Security. Now the party is openly opposed to extending the tax break.

"I'm not for that," said Rep. David Camp (R., Mich.), who heads the House's Ways and Means Committee, which oversees tax policy. "I don't think we can keep cutting into Social Security." House Speaker John Boehner (R., Ohio) has made similar comments.

Therefore, absent changes in political climate before the end of the year to extend the current cuts, wage earners can expect to take home 2% less of their wages starting in 2013 than they are now.