Forget the "Fiscal Cliff", It's the "Payroll Tax Cliff" that will Get Us

While the tax package that Congress passed New Year's Day will protect 99 percent of Americans from an income tax increase, most of them will still end up paying more federal taxes in 2013.

That's because the legislation did nothing to prevent a temporary reduction in the Social Security payroll tax from expiring. In 2012, that 2-percentage-point cut in the payroll tax was worth about $2,000 to a worker making $100,000 a year.  Approximately 125 million households will be impacted by the expiration.

Social Security is financed by a 12.4 percent tax on wages up to $113,700, with employers paying half and workers paying the other half. Obama and Congress reduced the share paid by workers from 6.2 percent to 4.2 under the Tax Relief Act of 2010 for the year 2011.  This provision was extended for 2012.

Taxpayers need to plan accordingly.  For example, the average raise for 2013 is expected to be 2.9%.  So before you plan that vacation, expect approximately two thirds of that increase to be eaten up by the 2% reduction in your paycheck due to the expiration of the payroll tax.  That means a raise of $2,900 for the $100,000 earner would result in a net benefit of $900.

Our tax professionals assist individuals and businesses with determining how changes in tax legislation will impact them.  We also provide proactive tax planning to help mitigate negative tax consequences.

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