What The Fiscal Cliff Deal Did To Your Paychecks

Planning & Saving
on January 14, 2013

While the White House and Congress wrangled over tax rates and spending cuts in the final hours of 2012, the Social Security tax holiday quietly expired. The tax holiday began in 2011, dropping the withholding rate for Social Security to 4.2 percent. The temporary cut was extended by Congress through 2012. With the expiration of this stimulus program, workers will see the Social Security tax rate return to 6.2 percent, which translates to an additional $2 withheld from their pay for every $100 of gross earnings up to $110,100. The 1.45 percent Medicare withholding tax is unchanged.

Income tax rates for most Americans remain unchanged, and the newly released IRS withholding tables for employers reflects this. While the Bush-era tax cuts have expired, the deal passed in early January 2013 continues the Bush rates for married couples filing jointly whose incomes are $450,000 or less, and for single filers with incomes of $400,000 or less. Capital gains taxes and taxes on dividend income for this income brackets also continue to be taxed at the 15-percent rate.

The top tax rate, which affects couples with incomes more than $450,000, and singles earning more than $400,000, has returned to the 39.6 percent rate established during the Clinton Administration. Taxpayers in these income groups will also pay a higher rate, 20 percent, on capital gains and dividend income.

Several tax credits for families have been extended with the fiscal cliff deal. The Child Tax Credit, which was expanded from $500 to $1,000 per child in 2010, has been continued. The credit is available to taxpayers with dependent children aged 16 or younger. This is a nonrefundable credit. The credit amount may wipe out any tax owed, but any amount of the credit exceeding the tax liability will not be refunded. The Earned Income Credit will also continue at 2012 levels for 2013. This credit is available to taxpayers with earned income between $13,980 and $50,270. This is a refundable tax credit.

The Expanded American Opportunity Tax Credit, formally known as the Hope Credit, provides tax relief for college students or their parents. The credit has been extended, providing $2,500 in tax credits for qualified education expenses. Up to $1,000 of this credit is refundable. The Child and dependent care tax credit has also been extended, allowing parents to take a credit of up to 35 percent of child care costs.

Taxpayers that anticipate qualifying for any of these credits may wish to review and submit a new W-4 form to their employer and possibly increase their take-home pay. While big tax refunds are nice, financially, it is wisest to pay in no more than necessary towards your income tax bill.

%d bloggers like this: