Welcome to 2013 and a higher tax bill. No, I’m not talking about the “fiscal cliff” follies.
Regardless of what Congress ultimately does or doesn’t do about our individual income tax rates in 2013, every worker is going to be paying a little bit more this year. The reason is that the payroll tax holiday, that 2 percentage point cut in the employee contribution to Social Security, ends on Jan. 1.
For a while it looked like an extension of the payroll tax cut from 6.2 percent to 4.2 percent might be continued as part of a larger fiscal cliff agreement to deal with expiring former President George W. Bush tax rates and automatic spending cuts. But as talks broke down and provisions were tossed out of the window of the Congressional car speeding toward the fiscal cliff, the employee payroll tax cut was one of the first to go.
To be fair, it was created as a temporary tax break back when the country was mired in a recession. The idea was that by giving people a few more dollars each paycheck — it came to about $20 extra each week for a worker earning $50,000 a year — they would spend the money and keep the U.S. economy from sputtering out altogether. That seemed to work. Economists at least say we’re out of the recession. And while there’s some concern that if Uncle Sam doesn’t offer more stimulus measures, we’ll fall right back into the economic mire, that’s not enough of a worry right now to save the payroll tax cut.
But more folks were concerned that the payroll tax cut was the wrong approach. They, and you can include me in that group, didn’t like that the reduction for workers also meant a reduction in the Social Security trust fund. That account already has issues, what with the ration of retirees who will collect the federal benefit growing faster than the younger workers putting payroll taxes into it. Representatives and Senators had this same payroll tax debate at the end of 2011 and eventually agreed to extend the payroll tax holiday through 2012.
But the big motivator there was that 2012 was an election year. That’s not an immediate worry for Capitol Hill now, so the payroll tax cut is history. President Barack Obama, however, is still pushing for economic stimulus measures and it’s quite likely that something else will be passed early in the new congressional session to give us all a bit more cash in hand.
Until then, get ready to see smaller 2013 paychecks, thanks to the return of 6.2 percent employee FICA withholding.
And a happy tax new year!
Want the latest news on taxes, tax reform prospects, filing deadlines, Internal Revenue Service alerts and tax-saving tips? Subscribe to Bankrate’s free Weekly Tax Tip newsletter.