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Why Our Paychecks Are Smaller This Year

February 26, 2013

Mark Cussen is a financial analyst and contributor for the website, Money Crashers Personal Finance. He writes about financial education and training and economic policy.

The political uproar over the fiscal cliff issue that permeated the media back in December has faded from the news headlines. However, the effects of the resolution to this matter are just beginning to be felt by millions of American workers who have since discovered that the amount of money they take home has suddenly shrunk.

Social Security Withholding
The reduction in pay is due to the increase in the amount of Social Security tax that is now being withheld. In 2010, President Obama reduced the amount of OASDI withholding by 2%, from the standard 6.2% to 4.2%, as a means of combating the recession by putting more spending money in the pockets of American consumers. However, the reduction was only slated to last for two years, and time has run out on this provision. It was not among the tax breaks that were extended under the American Taxpayer Relief Act, so workers have seen their Social Security withholding revert to the previous level since the beginning of the year.

Of course, while this increase comes as no surprise for those who read the fine print in the original bill that lowered the withholding, it has taken the majority of Americans by surprise. Someone who earns $50,000 a year will see $1,000 less this year than they did last year; a difference that is made more significant by the fact that it reduces net income after taxes and withholding. Financial planners and other professionals need to be able to effectively counsel their clients on how they can stretch their dollars further and trim their personal budgets without materially reducing their lifestyles and savings plans.

Other Tax Hikes
Unfortunately, Social Security withholding is not the only way that taxes are increasing under the new law. The Tax Policy Center in Washington, D.C. has stated that the average tax rate for Americans will rise by as much as 1.5% to nearly 22%, and that more than three-quarters of all Americans will pay higher taxes in 2013. Taxpayers in the $40,000 to $50,000 income range can expect to pay more than $500 more per year on average, and those in the $50,000 to $75,000 range will pay almost $900 more each year.

The wealthy will see the greatest increase in their tax bills in the following respects:
• The top tax bracket will once again rise to 39.6% as it was under the Clinton Administration.
• The income phase-out schedule for both personal exemptions and itemized deductions will also become much more severe for those who earn at least $250,000 a year.
• The rich will also pay higher taxes on dividend income, as well as an additional 3.8% tax on all investment income that will be levied on married taxpayers earning at least $250,000 and single taxpayers making $200,000 or more.

Obamacare
Although it is not a tax, the Patient Protection and Affordable Care Act will have a major impact on the bottom lines of upper- and middle-class America as the costs of healthcare and coverage rise.

Though take-home pay may be unaffected, deductibles and copays are likely to increase. Some full-time workers will see their hours cut back to part-time levels so their employer can avoid providing healthcare coverage. Furthermore, small businesses with near 50 employees may be forced to lay off workers to avoid the added expense of providing coverage.

Final Thoughts
The changes in the United States tax code that have resulted from the fiscal cliff resolution will likely impact us all in one way or another. The majority of Americans will need to adjust to having less money in their paychecks, while the wealthy may need to alter their investment strategies.

For more information on how these changes affect you, consult your trusted financial professional.


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