January 3, 2013

Payroll tax change to cost the average household $1,000

The temporary break on Social Security contributions ends, reducing Mainers’ net income amid the sluggish recovery.

By Jessica Hall jhall@pressherald.com
Staff Writer

Although Washington came to an agreement to avoid the so-called fiscal cliff and save most Americans from increased income taxes, the average Maine household will still pay almost $1,000 a year in additional taxes.

The Tax Policy Center, a Washington-based research group, estimates that 77 percent of American households will pay higher federal taxes in 2013. For most, the increase will come primarily from the loss of a temporary reduction in Social Security payroll taxes.

For the past two tax years, U.S. employees contributed 4.2 percent of their earnings to Social Security, down from 6.2 percent previously, as the government gave workers extra spending money as a way to stimulate the economy . For 2013, the tax rate returns to 6.2 percent on earnings up to $113,700.

In Maine, the median household income was $47,898 in 2011, according to the U.S. Census Bureau. The higher rate means the average Maine household will see about $958 less a year -- $18.42 a week.

"I don't see it as much of an issue," said Christopher Godin, owner of Granny's Burritos in Portland. "Personally, I have much more frustration with the politicians and the ridiculous way they went about the fiscal cliff talks.

"If I made a lot of money, maybe I'd care" about the payroll tax increase, Godin said. "But it's not going to affect my decision on whether to give someone a raise or not."

Without an agreement to avoid the fiscal cliff, taxes would have jumped by more than $500 billion in 2013, an average of about $3,500 per household, according to the Tax Policy Center, a joint venture of the Brookings Institute and the Urban Institute.

Still, losing 2 percent of annual income, "folks are going to feel the impact," said Joel Johnson, a policy analyst for the Maine Center for Economic Policy. "It's unfortunate timing, given the weak state of the economy and the weak state of the jobs situation."

But the payroll tax must be balanced against other benefits in the agreement reached by Congress late Tuesday, Johnson said.

"For folks living on the edge and making really difficult choices about basic needs, there is some good news," he said, citing extensions of unemployment benefits for another year, the child tax credit, the earned-income tax credit and the higher-education tax credit.

Without the extension of unemployment benefits, more than 2 million people who are long-term unemployed would have lost their benefits immediately, according to the National Employment Law Project, an advocacy group.

Other benefits of the agreement allow parents to keep a $1,000 child tax credit, and maintain a tax credit of as much as $2,500 for college tuition. The agreement also reversed a cut in the $3,000 credit for child- and dependent care that was due to take effect.

For Americans with higher incomes, the new package raises income tax rates. The rate increases from 35 percent to 39.6 percent for individuals whose annual income is above $400,000, and for married couples earning more than $450,000.

The federal Affordable Care Act of 2010 triggers an additional 3.8 percent tax on investment income for individuals earning more than $200,000 a year and couples earning more than $250,000 a year.

 

Staff Writer Jessica Hall can be contacted at 791-6316 or at:

jhall@pressherald.com

 

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