Fiscal hangover: Americans will see a payroll tax increase

January 4, 2013

Washington — Despite a late night deal Congress forged to avert historic tax increases, most Americans will still see less in their paychecks in 2013. That’s because the deal did not extend a payroll tax break that had saved the average family about $1,000 a year.

The payroll tax holiday had been a boon to poor and middle income families primarily because it applied up to $110,000 in income. In 2012, someone who earned $109,000 paid nearly the same in payroll taxes as someone who earned $1 million. Those whose earnings fall under that threshold will automatically pay a 6.2 percent tax on their total income.

For the last two years, the payroll tax had been chopped to 4.2 percent.

With all the rhetoric about Congress reaching a deal to spare the middle class, many Americans may not realize they will pay more until they feel the pinch in their first check of the new year.

“The people who live paycheck to paycheck, that will definitely hurt them,” said Dave Ogman, a financial adviser at Morgan Stanley Wealth Management in Boca Raton. “The person who has the $30,000 income and … needs that money for utility bills, to put food on the table, I think it will hit them hard and immediately.”

Most U.S. households will face their highest tax burden since 2008 due to the expiration of the payroll tax holiday, The Wall Street Journal reported.

The tax cut was intended to be temporary, but the Obama administration had initially pushed to extend it as part of a comprehensive budget deal. When the two parties could not find common ground, Vice President Joe Biden and Senate Minority Leader Mitch McConnell, R-Ky., negotiated a last-minute fix to stave off most of the scheduled tax increases.

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