Number of the Week: Expect Higher Tax Bill in 2013

Number of the Week: Expect Higher Tax Bill in 2013

Article
Comments (30)
REAL TIME ECONOMICS HOME PAGE »

By Phil Izzo

$1,001.08: How much more someone making the median household income in 2011 is likely to spend on payroll taxes next year.

No matter which party comes out on top in the November elections, nearly every working American is likely to pay higher taxes in 2013 than 2012.


Lost in the debate over the fiscal cliff and whether the Bush tax cuts should be extended for all Americans or just those who make more than $250,000 is the expiration of a tax holiday both parties quietly support.

In an effort to stimulate demand and put more money into consumers’ pockets, Congress temporarily lowered the Social Security tax withholding rate to 4.2% from 6.2% for 2011 andearlier this year extended it into 2012. The holiday in the so-called payroll tax is set to expire at the end of this year, and so far neither party has expressed much interest in another extension.

The two percentage point reduction in the payroll tax would reduce government revenue by about $110 billion per year, according to an analysis by PIMCO. That’s not a huge amount in a $3.8 trillion budget, but both parties have lately been trying to find ways to trim deficits. The tax cut was always meant to be temporary, and letting it expire as expected is a quiet way to increase revenue as bigger tax issues are negotiated.

But even if other tax increases aren’t triggered in the so-called fiscal cliff, the expiration of the payroll-tax holiday is going to mean less money in consumers’ pockets next year. For someone earning the 2011 median income of $50,054 that translates into $1,001.08 a year or about $40 less in a biweekly paycheck.

The increase also affects pretty much every working American. While 46% of households don’t pay federal income tax, which is phased out for low earners, just 18% of households avoid the payroll tax, according to the Tax Policy Center. That means even people with low incomes can expect a higher tax bill in 2013. There is a bright side for high earners, though. Workers only are charged payroll taxes on the first $110,100 of income, so whether your income is $110,101 or $110 million the most your 2013 increase can be is $2,202.

 Calculate you tax increase [HERE]