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Hike in Social Security maximum means increase for high earners

01-30-2017

Tax_Increase_stamp_illustration_550xBy Donna M. Mullin, J.D., CPA

Many high earners this year will be hit with a 7.3 percent hike in Social Security payroll deductions – the largest increase in 34 years.

The increase results from the gross salary amount subject to withholding increasing from $118,500 to $127,200 – meaning an additional $8,700 will be subject to the 6.2 percent Social Security withholding tax.

About 12 million workers are expected to be impacted by the changes, with many seeing an increase of $539 – or more if they are self-employed.

Effect on self-employed, others

Because business owners and others who are self-employed pick up their own payment as well as the “employer’’ share – a combined 12.4 percent tax rate — they are looking at a potential up-front increase of about $1,000. However, half of that will be offset later by income tax deductions.

Anyone who pays taxes quarterly may see an increase in the amount due during the final quarter of 2017, if payments are based on their 2017 income.

The nation’s 161 million workers with an annual income at or below $118,500 will not experience any change in the amount they pay in Social Security tax because their income will not reach the taxable maximum.

The Social Security Administration estimates this year’s change may raise an additional $11.6 billion in tax revenue. Unfortunately, because the tax is based on income before taxes, there are no available strategies to offset its impact on taxpayers.

The “why’’ behind the increase

Two totally different, but related, indices come into play for the two sides of Social Security. The Consumer Price Index, calculated each October, determines whether retirees receive a Social Security cost-of-living adjustment (COLA) and the amount of that increase if it exists. The National Average Wage Index sets the maximum amount wage earners are taxed to fund Social Security.

Last year, the Consumer Price Index was stagnant and retirees’ benefits remained flat. At the same time, wages that were stymied during the recession began to rebound, as reflected in the National Average Wage Index.

By law, the Social Security taxable maximum cannot be increased during a year when recipients do not receive a cost-of-living increase so, this year, top wage earners are essentially experiencing two years’ worth of increase to make up for no adjustment last year.

Looking ahead

According to the Social Security Administration (www.ssa.gov), the maximum taxable income was set at $3,000 from its establishment in 1937 until 1950, the equivalent of nearly $50,300 today. Congress increased the level manually until the late 1970s when indexing first created automatic adjustments. Historically, maximum taxable earnings have increased by an average of $1,000 annually, proportionate to wage increases, remaining at $106,800 from 2009 to 2011 during the recession and at $118,500 for 2015 and 2016.

The good news is that this type of “perfect storm” is an aberration. As the U.S. economy continues to improve, we will experience inflation that will, in turn, be reflected in the Consumer Price Index and lead to cost-of-living adjustments for Social Security beneficiaries. The increase in the maximum taxable income will be more gradual than this year’s 7.3 percent hike and should keep pace with increases in salaries.

Many in the workforce, including me, would like to see a more direct correlation between the amount we pay in Social Security taxes and the amount our friends and family receive in Social Security benefits. Unfortunately, there seems to be little connection between these inflation adjustments to taxes paid and benefits received. This year, despite the tax hike, retirees are seeing an increase of just .3 percent in their monthly checks.

There also is no correlation between the greater number of Baby Boomers applying for benefits and the increased maximum taxable income or anticipated future funding shortage for Social Security mentioned during last year’s presidential campaign.

Donna M. Mullin, J.D., CPA, is a director of Boyer & Ritter LLC’s tax department and has more than 25 years of experience in public accounting and 10 years of experience in the private practice of law. She can be reached at 717-761-7210 or dmullin@cpabr.com

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