Snyder and Associates

Tax Byte

2013's Looming Pay Cut?

While that title might cause a bit of consternation, the reality is that if Congress does not act with regards to tax legislation by the end of the year, nearly every working American will face a tax increase. There are two key areas that will impact what most people see in their "take home pay".

  • The expiration of the "Bush Tax Cuts", as they have come to be known
  • The expiration of the Social Security employee tax reduction

"Bush Tax Cuts"

Among other changes, the legislation passed under former President George W. Bush in 2001 made across the board changes to the marginal tax rates. These tax cuts were originally set to expire December 31, 2010; however, Congress and President Obama have extended them through 2012. Many political spin doctors and media outlets have portrayed the Bush Tax Cuts as impacting only wealthy Americans. However, that is not the case.

The Bush Tax Cuts created the 10% marginal tax bracket as the lowest tax bracket. Prior to that legislation, the lowest marginal tax rate was 15%. This means that in 2012, the first $17,400 of taxable income for a married couple filing jointly is taxed at only 10%. This holds true for most taxpayers…the first $17,400 of taxable income is taxed at 10%, regardless of the taxpayers' total taxable income. All other tax rates were also reduced, as a result of the Bush Tax Cuts.

If the Bush Tax Cuts expire on December 31, 2012, as they are currently scheduled to do, all of the marginal tax rates will increase: the current rates of 10%, 15%, 25%, 28%, 33%, and 35% will be replaced with rates of 15%, 28%, 31%, 36%, and 39.6%.

Social Security Tax

In February 2012, President Obama enacted legislation to extend the "payroll tax reduction" that existed in 2011 through 2012. This legislation is also set to expire December 31, 2012. The payroll tax cut was a reduction in the amount employees (and self-employed individuals) contributed to Social Security.

Historically, employees would pay 6.2% of their wages (subject to an upper limit, $110,100 in 2012) to Social Security, and employers would also pay 6.2%. Legislation enacted in December of 2010 reduced the employee portion of the Social Security tax to 4.2% of wages. Hence, an employee making $50,000 annually went from paying $3,100 in Social Security tax to paying $2,100. This reduction in tax was seen by way of less withholding on the employee's paychecks. Therefore, if this provision expires on December 31, 2012, employees across the board will see an increase in the Social Security tax with the first paycheck in January 2013.

There are many other impacts if the Bush Tax Cuts are allowed to expire. Congress continues to discuss and debate these topics and many others. Please watch for future TaxBytes for legislative updates.

This TaxByte is intended to be "politically neutral" and to provide unbiased, objective facts.


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