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  • Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#74 - Subtle Tax Increase


Subtle Tax Increase

Typically, when the word “taxes” is mentioned most people (myself included) immediately think of income tax. In reality, there are a number of other taxes (sales tax, property tax, etc) that a person may be subject to.


Today I wanted to discuss the progression of Social Security tax over the last decade.


Social Security tax is a tax paid on applicable income equal to 12.4%. Employees pay 6.2% of this tax and employers pay 6.2% of this tax. There is a wage limit for the tax. In 2021 that wage limit is $142,800. Therefore once you have applicable income that exceeds this $142,800 the Social Security tax no longer applies.


For example, a W2 employee with applicable income of $100,000 would pay $6,200 in Social Security tax ($100,000 * 6.2%). A W2 employee with applicable income of $200,000 would pay $8,854 in Social Security tax ($142,800 * 6.2%).


The interesting thing with social security tax is even when the percentage doesn't change additional tax can be owed as the wage base increases.



In other words, an individual with applicable income of $150,000 in 2021 is paying $2,500 more in Social Security tax this year than they would have if they made the same income in 2012.


Now, the increase in the wage base is not just random. In 2021, it was based on an average wage index. You can read more about this here.


The social security wage base doesn’t increase every year, however, more often than not it does. And for that subset of individuals that have applicable income more than the wage base, this represents an ongoing increase in taxes. (Now it should be mentioned this should result in a small increase in benefits as well.)

 

Interesting Article(s) or Video(s)

  • This article was seen on Kitces.com. This proposal is not law and may never happen but it is helpful to know the types of things that are being considered.

  • Recharacterizations often are forgotten but can be very useful in the right situation.

 

Thank you for reading!

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