Higher taxes are coming for most, despite fiscal cliff deal
Yes, Congress' last-minute wrangling helped middle-class Utahns and other Americans dodge a hefty hike, but don't think taxes won't be going up.
They will and not just for the rich, but for nearly everyone with a job.
That's because, with wide bipartisan agreement, the temporary 2 percentage-point reduction in the Social Security payroll tax enacted in 2009 was allowed to expire at the end of 2012.
The cut, worth hundreds of dollars a year to a worker making about $50,000, will mean fatter coffers for Uncle Sam and leaner paychecks for workers.
"It kind of sucks because the payroll tax is getting a bigger raise than my employees [will get this year]. That's how I look at it," Leslie Fiet, owner of two Mini's Cupcakes in Salt Lake City, said Wednesday.
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. To aid the economy, the White House and Congress reduced the share paid by workers from 6.2 percent to 4.2 percent for 2011 and 2012, saving a typical family about $1,000 a year.
President Barack Obama pushed to enact the payroll tax cut for 2011 and to extend it through last year. But neither party fully embraced the reduction, and this year there was general agreement that it should expire.
"This was an appropriate stimulus when it took place, and I believe the economy is strong enough now to work through an increased payroll tax, particularly in Utah," which is growing faster than the U.S. economy, Salt Lake Chamber economist Natalie Gochnour said.
But, given that income above $113,700 isn't subject to the Social Security tax, the effect of losing the temporary cut will be felt most by lower-income taxpayers, especially workers with little or no money left after paying bills and other basic living expenses.
"For a lot of people, it is going to be painful," said Clark Shaw, executive vice president of VISTA Staffing Solutions, a Salt Lake City-based staffing services company that places back-up physicians in temporary positions at U.S. hospital and physician practices.
Shaw's next paycheck will take a dive as the higher Social Security tax kicks in. He won't, however, be hit by higher income taxes because Congress increased the tax rate from 35 percent to 39.6 percent only on incomes above $400,000 for individuals and $450,000 for married couples. Neither will other higher-income earners at his company.
"I think it's good for everybody in this office to not have an additional tax burden of a couple of thousand bucks or more," he said. "I can afford to pay a little more, but I'm still glad that I don't have to."
Obama had pushed for higher tax rates on incomes over $250,000. Some Utah executives said the higher income thresholds that Congress and the White House settled on seemed fair. What didn't seem right, though, was that higher taxes weren't balanced with significant spending cuts, which for now have been delayed.
"I think $250,000 was probably too low, but I think $450,000 is good," said Robert Cannon, chairman of AutoNetTV, an American Fork company that develops television programming for car dealers and automotive services providers.
"But there's got to be cuts in spending," he added. "If you are not going to address both issues, raising income taxes is going to have no impact at all on erasing this enormous [budget] deficit that we have."
Cannon would have faced a higher tax bill if Congress had set higher tax rates at incomes above $250,000. Because the threshold is now higher, he will use the savings to offset the cost of growing his company. Higher taxes would slow down the expansion, which began last year when AutoNetTV hired six more employees, he said.
Frank Dsouza, who owns Seaich Corp., a Salt Lake City-based import, manufacturing and distribution company, also thought $250,000 was too low.
"Right now, the median income level of most families is about $50,000," he said. "So if somebody is making that level of $450,000, they should be paying the tax the government has proposed."
How tax increases will affect households
A temporary Social Security payroll tax reduction is expiring, hitting nearly every wage earner, and income taxes on the wealthy are going up too.
Annual income: $20,000 to $30,000
Average tax increase: $297
Annual income: $30,000 to $40,000
Average tax increase: $445
Annual income: $40,000 to $50,000
Average tax increase: $579
Annual income: $50,000 to $75,000
Average tax increase: $822
Annual income: $75,000 to $100,000
Average tax increase: $1,206
Annual income: $100,000 to $200,000
Average tax increase: $1,784
Annual income: $200,000 to $500,000
Average tax increase: $2,711
Annual income: $500,000 to $1 million
Average tax increase: $14,812
Annual income: More than $1 million
Average tax increase: $170,341
Source: Tax Policy Center
Other legislation highlights
Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent.
Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.
Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle-income taxpayers from being hit with higher tax bills averaging almost $3,000.
Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated "bonus" depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rule changes on converting traditional individual retirement accounts into Roth IRAs.