Just Announced for 2017: A Middle Class Tax Increase


November 16 2016

As families across Colorado and the country are preparing for the holiday season, it’s easy to be caught up in the cheer and festivities. But don’t miss this change coming in January that could have a big impact on middle class families.

Mark Avallone discusses the implications of this tax increase for middle class families in the article below. Tax increases can be hidden in things like gas prices. These challenges should be considered carefully, especially for those planning for retirement.

As you approach retirement, your goal is to keep as much discretionary income as possible. But higher taxes reduce the amount you can set aside for retirement.

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Just Announced for 2017: A Middle Class Tax Increase

Mark Avallone

If you are a middle-class earner there’s a good chance you might be scheduled to have your taxes increase – and you might not even be aware of it. Effective January 1, 2017, the amount of your income that is subject to the 7.65% Social Security and Medicare tax increases from rise from $118,500 to $127,200. This means that for an American worker who was fortunate enough to earn in the higher end of the middle class income range, their taxes could go up by as much as $655 per year.  And a married couple with each partner earning an income over that threshold could see a tax hike of $1,331. The increase to the amount of income that is subject to these ‘payroll’ taxes is up almost 100% in the past twenty years. There is no telling what the limit will be in the future especially given the financial condition of social security.

While the impact of this tax is perhaps the biggest issue, one question that also comes to mind is why a tax increase like this is not more widely discussed? It seems the government wants more transparency on airline fares, mortgage pricing, banking services and in so many other industries but when it comes to taxation, I am not sure how many Americans know what is happening. Just consider what happens at the gas pump. I would imagine that, for example, drivers in Pennsylvania might be surprised to know they are charged 18.4 cents per gallon in federal gas taxes and over 50 cents per gallon in state taxes.

From a planning perspective, taxes are a hurdle for those saving for retirement. With the middle class already facing a variety of financial challenges including higher health care costs, these tax increases create yet another economic headwind for those planning for their financial freedom. In my recent book, Countdown to Financial Freedom, I discuss in detail these and other challenges the middle class faces when planning for retirement.

For many people, their earned income is their greatest source of cash flow, and what income is left over after their income and payroll taxes are paid is known as net after-tax income or net income. From this net income amount, essential expenditures are made and any remaining money is known as discretionary income. This is the amount that can be used for luxuries or for saving. The challenge for a middle-class earner is to have as much discretionary income available as possible, and a payroll tax increase reduces this amount. Higher payroll taxes like the one scheduled for January 1, 2017 means that individuals and families will have less money available to set aside for their own Financial Freedom.

Social security and Medicare (payroll) taxes are some of the most regressive taxes we have in this country. With these payroll taxes, the first dollars earned are subject to taxation which is different than how income taxes are assessed by both state and federal taxing authorities. Despite the regressive nature of this tax, some feel it is also a fair tax since almost half of Americans pay no federal income tax, and at least through payroll taxes, all workers contribute into the system.

In an attempt to close the future shortfalls in the Social Security Trust Fund and to make this tax fairer, the drumbeat in Washington has increasingly been to eliminate the limit of income subject to payroll tax. By doing so they feel they are addressing an aspect of the tax that favors the wealthy – or at least favoring those with higher earnings. And in an era where fairness is the watchword, and with social security not being in great financial shape, the possibility of eliminating the cap on earnings subject to payroll taxes is increasing. If the taxable wage base ceiling is eliminated, it would be an enormous tax hike for many middle class and affluent families who may already be struggling to save for their children’s college or their own retirement will feel the burden. And small business owners, who pay both the employer and the employee portion of the payroll tax, will get hit doubly hard.

The challenges for social security are real and need to be addressed. But the challenges for the middle class are also very real. We need leadership out of Washington that considers all factors when implementing a smart tax policy especially when it impacts so many Americans.

This article was written by Mark Avallone from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.

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