1. Now that the Congress has come to an Agreement on 2013 tax rates, what, if any, effect will this have on the average earners paycheck?
a. Key Changes include a 2.0 percent increase to the Employees' portion of FICA withholding. Employers portion remains unchanged at 6.2 percent.
b. The top tax bracket was increased to 39.6 percent from 35 percent - which will have no effect to the average wage earners paycheck.
c. Additionally, the low to mid income households will see no effect to their taxes from the increased capital gains rates; while the wealthier households will see a 5-percent increase in taxes on capital gains and dividend income.
d. Some valuable tax credits were extended as part of the Agreement, including the Child Tax Credit, EITC thresholds and certain Educational Tax Credits which are very helpful for all households, regardless of income levels.
2. Does the return to 6.2 percent FICA rates impact the Employers cash flow and potentially impact any hiring decisions?
a. No, two years ago when the 2.0 percent decrease was implemented for wage earners, the Employers' portion was never changed. Therefore, there is no effect to Employers' due to the return / increase of the 2.0 percent FICA limits. As such, highly unlikely that the increase will impact hiring decisions.
b. Employers will need to explain to their employees that their checks will be affected in as little as 2-3 weeks. When the reduction was originally made to reduce the Employees FICA withholding taxes by 2.0 percent, the State Legislature in IL decided to increase the State withholding amounts by the same 2.0 percent. As such, IL workers did not see any impact when the change to FICA W/H was implemented. Now, after two years, the affects will be realized.
3. How does this affect the stock market (generally speaking) and will this detrimentally impact the ability to gain new employment?
a. The stock market / economy suffers during times of uncertainty. An Agreement being reached, albeit at the 11th (or just past the 12th hour), is still an Agreement. And although short term in nature, it provides some certainty with regard to planning for personal & corporate taxes during the current year. Certainty is positive to the economy and a favorable economy leads to more employment, not less.
Take Away - Summary Info:
1. Certainty is always better than uncertainty - the market has reacted favorably now that some decisions have been made by Congress. Let's hope this trend continues in February / March when the Sequester and Debt Ceiling debate heats up.
2. For a $50k Annual Wage Earner, the return to the 6.2 percent FICA levels will have a $1,000 impact annually (i.e., a 2.0 percent increase in FICA withholding tax). The maximum impact on an employee is $2,274 should the top limit of $113,700 be reached in 2013. This will become a reality and affect paychecks within the next 3-4 weeks.
3. Numerous credits have been extended for the benefit of taxpayers at all Income levels. And, as with any year, 2013 will be a very important year to consult with a CPA to understand how you may benefit from these, and how best to plan with these in mind.
Joshua A Stein, CPA
Managing Director SteinCapitalAdvisors, LLC
1640 W. Hubbard Street
Chicago, IL 60622