The last few years, we have enjoyed (for lack of a better word) a 2 percentage point reduction in our 6.2% Social Security (FICA) tax rate, to 4.2% of wages earned during 2011, temporarily extended through 2012 by the aptly named Temporary Payroll Tax Cut Continuation Act of 2011.
Unless the tax rate is extended again, in 2013 we will once again be paying into Social Security at the rate of 6.2%. That means $1,000 less to spend next year if you make, say, $50,000 per year.
Social Security is also referred to as Old Age, Survivors and Disability Insurance (OASDI). Social Security has a nicer ring to it I suppose.
The 6.2% OASDI withholding rate has been in place since 1990. The statutory OASDI rate started out at 1% on employee wages from 1937 to 1949 and increased about 20 times through the years until it reached its current 6.2%.
Though the Social Security tax rate itself hasn't increased over the last 22 years, actual taxes paid have indeed grown as the annual maximum wage base has increased.
In 2013, the FICA wage base increases from $110,100 to $113,700. Thus, if you make at least $113,700, your FICA taxes in 2013, assuming the 6.2% rate returns, will be $7,049 as compared to $4,624 in 2012. Ouch. That. Hurts.
Over the last 20 years, the Social Security wage base has doubled, whereas inflation has grown by roughly 60%. While that's somewhat of a bummer for those that earn more than the FICA wage base, I guess that's better than having NO wage base cap, like Medicare taxes.
That's a nice segue for another payroll tax increase beginning January 1, 2013. The employee portion of Medicare taxes will increase from 1.45% of wages to 2.35% of wages exceeding $200,000 per individual (or $250,000 for married filing jointly). Those fortunate (or maybe unfortunate in their mind) to earn that much have Obamacare to thank for that increase.
And speaking of Obamacare, starting in 2013 there is an additional 3.8% Medicare tax on investment income such as dividends, interest and capital gains when your "Modified Adjusted Gross Income" (whatever that means) exceeds $200,000 if you're single or $250,000 if you're married. I won't get into the gory details here as most of you (me included) are not in this boat.
Depressed yet? Well if you are benefiting from a pre-tax Flexible Spending Account (FSA) this year and your annual FSA deduction is greater than $2500, you probably already know that next year you are being capped out at $2,500. This is yet another tax increase, though a savvy politician might not call it that. But it is. Reducing or eliminating an existing tax deduction or tax credit is, indeed, the equivalent of a tax increase to those who are its unlucky recipients.
It's not all bad. One eensy weensy bit of good news is that the maximum 401k contribution cap in 2013 has been increased by $500, to $17,500. If your company offers a 401k and if you can max this out, you certainly can defer a lot in taxes. If your 401k has a Roth feature, strongly consider it. Pay taxes today on Roth contributions and never pay taxes on future withdrawals.
Ta ta, or, err, tax, tax, for now.