The tax package passed by the US Congress on the New Year’s Day will protect a majority of Americans from an income tax increase. However, Americans will still have to pay higher federal taxes in 2013 due to the expiry of a temporary reduction in the Social Security payroll tax, according to a Washington research group.
The Congress has done nothing to prevent the expiry of the 2-percentage point cut in the payroll tax of about $1000 for a worker earning $50,000 per year. Consequently 77% of American households from all income groups will have to face federal taxes in the current year, the group adds.
According the Tax Policy Center, households having earnings in the range of $40,000 to $50,000 will face an average tax increase of $579 in 2013. Similarly households earning between $50,000 and $75,000 will face an average tax increase of $822. The tax increases can even be higher than this, the research group says.
The tax cuts were first enacted under the President George W Bush and were scheduled to expire on January 1, 201,3 as part of the fiscal cliff. Under the Bush era- taxes were lowered for families at every income level, investment and estate taxes were also reduced and a number of tax credits were increased. The package passed on the New Year by the Senate and the House extended most of the Bush era tax cuts for individuals earning less than $40,000 and married couple making less than $450,000.
As Obama said, the deal covers a majority of households. But the increase in payroll taxes will also hit nearly every wage earner in the country, the Tax Policy Center points out. Social Security in the US is funded by a 12.4% tax on wages up to $113,700 with both the employers and the employees contributing 50%. The new package reduces the share paid by workers from 6.2% to 4.2% for the years 2011 and 2012 which resulted in average savings of $1000 per year. The cuts were not extended for 2013 and have expired.
The new tax package calls for increase in income tax rate from 35% to 39.6% on income above $40,000 for individuals and $45,000 for married couples. The package also calls for increase in investment taxes for people falling in the new top tax bracket.
Another increase in taxes for Americans is due to Obama’s 2010 health care law. High income families in US will have to pay higher taxes due to a new 3.8% tax on investment income. This tax is applicable for individuals earnings more than $2000,000 a year and couples making more than $250,000.
According to the Tax Policy Center Analysis, households earning between $500,000 and $1 million will have an average tax increase of $14812. Households earning more than this will see an average tax increase of $170,341.