Flipping the financial calendar. Social security taxes to rise; income taxes for some may fall
On New Year's Day, Uncle Sam will start giving more money to some Americans and taking more away from others. Changes in federal law taking effect Jan. 1 that will impact people's pocketbooks include:
A small tax cut. Americans whose incomes do not rise in 1986 will see their federal income-tax bill decline as a result of the federal tax system being indexed to offset the effects of inflation during 1985.
A boost in social security taxes. Workers will see the social security deductions from their 1986 paychecks go up for two reasons. The rate at which wages are taxed will rise, as will the maximum amount of income subject to social security tax. The maximum social security tax bite on individuals climbs 7.6 percent to $3,003.
An increase in social security benefits paid to retirees and their dependents, the disabled and their dependents, and survivors of deceased workers. The payments are being boosted 3.1 percent to offset inflation in 1985.
These changes, while significant, are much less sweeping than would have been the case if Congress had finishing a major revision of the tax code in 1985. Some of the provisions in the tax overhaul bill that cleared the House earlier this month would have taken effect Jan. 1. But before adjourning for the holidays, the House and Senate passed resolutions calling for a January 1987 effective date for the overhaul.
The overall impact of the Jan. 1 changes in the social security and tax laws varies. For some people, especially those making less than the $42,000 cutoff for social security taxes, the income-tax cut resulting from indexation could be offset by higher social security taxes.
As of Jan. 1 several facets of the tax code will be raised 3.7 percent to offset the rate of increase in the consumer-price index for urban workers in fiscal 1985. The personal exemption will climb from $1,040 to $1,080. The standard deduction for married couples filing jointly will climb from $3,540 to $3,670. Tax brackets will be widened so that more income is taxed at lower rates. And the effect of these changes will be reflected in money withheld from paychecks.
Social security benefit hikes are the result of the 3.1 percent increase in the average consumer-price index for urban wage earners and clerical workers from the third quarter of 1985 compared to the third quarter in 1984. As a result, the average retired worker will see his monthly check increase $14 from the current $464.
An increase in social security benefits triggers an examination of increases in average wages, the measure used to adjust the wages subject to social security tax. Since average wages rose 5.9 percent from 1983 to 1984, wages subject to social security tax climb from $39,600 in 1985 to $42,000 in 1986. An increase in the payroll tax rate from 7.05 this year to 7.15 in 1986 was already scheduled.