It’s
tax time again, and President-elect Donald Trump and his fellow
Republican in Congress have promised to slash them—especially for
corporations and the rich.
For millions of Americans, however, a tax increase
will be the first thing they see. About 12 million workers will pay
more this year thanks to an automatic adjustment in their payroll taxes.
Unlike previous years, this rise in the Social Security “taxable
minimum” —the amount of income subject to tax—is a whopper: 7.3 percent,
the most in 34 years. That could cost each affected worker as much as
$539, and much more if they’re self-employed.
Why is 2017’s increase so huge? And where does this taxable minimum come from anyway? Let us explain.
What’s changing this year?
Workers
at the top of the income spectrum pay Social Security payroll taxes
only on a portion of their wages. For the last two years, only the
first $118,500 of earnings was subject to the 6.2 percent tax. In 2017,
this taxable minimum jumps to $127,200.
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How much could this cost me?
If
you make less than $118,500, you won’t notice a difference. But if you
earn more, an extra $8,700 could now be subject to the 6.2 percent
Social Security payroll tax, costing you as much as $539 more by the end
of the year. Employers, who pay their own 6.2 percent tax on
payrolls, will see costs rise, too—self-employed workers could see their
Social Security tax burden jump to more than $1,000. However, as
always, they’re able to deduct the employer portion on their income tax
returns.
What’s the total price tag to U.S. households?
About $11.6 billion in new tax revenue could come from the change in 2017, the Social Security Administration estimates.
Why such a big increase?
A 7.3 percent hike is way above inflation: The main U.S. consumer price index was up 1.7
percent in the 12 months ending in November (the latest data
available), and it rose just 0.7 percent in all of 2015. So what’s going
on here? Well, the Social Security taxable minimum is adjusted
annually based on an index of U.S. wages, not consumer prices. The National Average Wage Index was up 3.5 percent in 2015, five times faster than inflation.
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But
the real reason for this sudden, steep hike is simply that the
government is making up for lost time. The 2017 hike is essentially two
years of wage gains packed into one. The wage index also rose 3.6
percent in 2014, but the Social Security Administration couldn’t raise
the taxable minimum last year because rules prevent an increase from
happening in a year when Social Security recipients don’t get a
cost-of-living increase.
Related:
How unusual is a 7.3 percent increase?
It’s
the largest percentage rise since 1983. When the Social Security tax
began in 1937, it applied only to the first $3,000 earned, an amount
that remained steady until 1951. Congress then periodically raised the
taxable minimum until laws in the late 1970s began indexing it to wage
growth.
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Adjusted
for inflation, the rise in the taxable minimum looks less dramatic. You
can still see, however, the impact of substantial rises in the 1960s
and 1970s, which helped pay for Social Security benefit increases for
middle and upper-middle-class Americans.
How many people are affected?
About 12
million will pay more because of the higher minimum this year, the SSA
estimates, out of 173 million workers paying into Social Security. In
any given year, about 6 percent of all workers make more than the
taxable minimum, a number that’s been consistent for decades. The SSA
estimates that almost 20 percent of workers reach the taxable minimum at
some point in their careers, even if it’s only for one year.
Why does the taxable minimum exist?
The
U.S. income tax was envisioned as a progressive tax, with the
wealthiest supposedly bearing the largest tax burden and the
lowest-income Americans paying nothing or even receiving tax
credits. The Social Security payroll tax is unusual in that lower-income
Americans end up paying a greater share of their income than the rich.
The
main idea is that the Social Security taxes you pay should more or less
correspond with the benefits you eventually receive. However, the
benefit formula is progressive, with lower- and middle-income
getting bigger Social Security checks relative to what they put in than
the wealthy. No matter how much you contribute, the most you can get
from Social Security this year is $2,687 per month.
Doesn’t Social Security need money?
In the course of the 2016 election campaign, a growing number
of Democratic politicians and policy experts floated the idea of
raising more revenue for Social Security. The idea was to use the money
to expand benefits and patch the program’s long-term funding shortfall. Those ideas are largely dead under a Republican controlled White House and Congress.
One
argument for raising the taxable minimum is that the Social Security
payroll tax hasn’t kept up with massive, ever-widening income inequality
in America. While the share of citizens who exceed the taxable minimum
has held steady, the share of the nation’s income subject to the Social
Security payroll tax has been slipping, from 90 percent in the early
1980s to less than 83 percent. That’s because workers at the very top
are earning so much more than they used to, and the vast majority of
their wages avoid Social Security payroll taxes.
Does the rate hike mean my benefits will rise, too?
Barely.
While the taxable minimum is based on an index of U.S. wages, Social
Security benefits are based on prices. Given low inflation, they’re
inching up just 0.3 percent. That 2017 cost-of-living adjustment means
the average retired worker gets an extra $5 a month, bringing the
average retiree's monthly Social Security check to $1,360.
Any other nasty surprises coming in 2017?
If
you try to max out your retirement accounts every year, you may be
disappointed to learn that the amounts you can contribute to an
individual retirement account or a 401(k)-style retirement plan are
holding steady. In 2017, there’s still an annual limit of $18,000 for
contributions to a 401(k) and $5,500 for an IRA. Workers 50 and older
can save an extra $6,000 in a 401(k) and $1,000 in an IRA, so-called
“catch-up contributions” that are also the same as last year.
One
change in 2017 that could be very costly to some Americans relates to
tax refunds. A new law requires the Internal Revenue Service to hold
onto refunds for people claiming the earned income or additional child
tax credits until mid-February. The IRS also warned that new safeguards
against fraud and identity theft could delay refunds further.
A
delayed refund isn’t technically a tax increase. But it might feel like
one for millions of low-income Americans who typically rely on refunds
to pay back debt and cover basic expenses at the beginning of the year.
--With assistance from Jordan Yadoo in Washington.
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