The following is a guest post from Elaine McPartland of Consolidated Credit. If you are interested in guest posting, please see our guest posting guidelines.
In the struggling American economy, where people already face too many financial crises in their everyday life, there is one more threat looming in the horizon. With the start of the New Year, the speculations regarding the increase in tax levels have been quite ripe. Now that it is very clear that Americans will be facing an increase in almost all payable taxes, the implications of this can be quite negative for everyone.
Impact of Increase in the Payroll Taxes
The most comprehensible effect of this tax rise, especially that of the payroll tax, will result in two major consequences. First, the household debt on American families is expected to rise quite substantially since they will have fewer dollars to spend on average. Reports have suggested that the debt-to-income ratio for people above the age of 35 has risen to an alarming 1.22, which is the highest it has been in the last three decades. Due to further increase in the payroll taxes, this ratio can continue to rise, which can lead to further financial crises for the American economy. To get a better idea of where you stand in terms of finances, you can use a debt ratio calculator.
Another major impact of rising payroll taxes is felt on the asset of the house itself, the value of which has gone down by 22% in the last five years. Rising inflation, increasing taxes and unemployment has made it difficult for people to save money. According to a report, American families can face a cut back of $400 in their monthly household expense budget due to the increase in taxes. Moreover, the continuously unstable prices in the housing and other asset markets make it difficult for people to invest in assets.
Which Taxes Are Going Up?
While it is true that the increase in payroll taxes can have the most profound effects, almost all other taxes will be going up too, making the overall impact far more damaging to the households and the economy. So, here are some taxes that will be going up this year which you should look out for:
In the past few years, a cut was offered on the payroll taxes to make up for the loss of Make Work Pay Credit facility. The extension period of this payroll cut has finally come to an end which means the employees will go back to paying 6.2% in lieu of Social Security from their payroll instead of the 4.2% they were currently paying. This 2% increase in their payroll deduction is going to reduce the spending power of Americans to quite an extent.
Federal Income Tax
The cuts that were being offered to people in the federal income tax currently as an attempt to stabilize people during recession will finally be stopped. The income tax rated is expected to rise quite substantially, going up by around 3% on an average during this year. Both for individual taxpayers and households, this will mean further cut backs in their expense budget which can increase their debt to income ratio.
Federal Estate Tax
It is expected that in the current year, more people will be subjected to pay the federal estate tax and fewer exemptions will be offered to people. Not only will the exemption be eliminated, but also the tax rates would be increased to some extent. Both these factors combined together can make asset ownership quite difficult for households who will already be struggling financially due to other tax increases.
Medicare taxes, which are paid in addition to the Social Security tax, are also expected to rise, going up to almost 3.8% for many people. This higher rate will be applicable on all the investment and unearned income except those made towards retirement planning and the pension payments you receive.
With the increase in all these taxes at once, the financial scenario for households is definitely bleak. Not only will their disposable income go down substantially, their expenses will also rise somewhat due to inflation. While asset accumulation will become more and more difficult for households in the future, their debt levels will also rise if they are careless in their financial planning.
Author’s Bio: This article is composed by Elaine McPartland who is associated with “Consolidated Credit” as their community writer. She has an expertise in writing articles related to debt consolidation and how to pay off debts easily and smoothly. You can add her at her google+ profile.