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January 09, 2017 at 07:43 AM
It’s tax time again, and President-elect Donald Trump and his fellow Republicans 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 because of 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%, 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 past two years, only the first $118,500 of earnings was subject to the 6.2% tax. In 2017, this taxable minimum jumps to $127,200.
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% Social Security payroll tax, costing you as much as $539 more by the end of the year. Employers, who pay their own 6.2% tax on payrolls, will see costs rise, too—self-employed workers could see their Social Security tax burden jump to more than $1,000. As always, however, 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% hike is way above inflation: The main U.S. consumer price index was up 1.7% in the 12 months ended in November (the latest data available), and it rose just 0.7% 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% in 2015, five times faster than inflation.
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% 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.
How unusual is a 7.3% 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.
Adjusted for inflation, the rise in the taxable minimum looks less dramatic. You can still, however, see the impact of substantial rises in the 1960s and 1970s, which helped pay for Social Security benefit increases for middle-class and upper-middle-class Americans.
