Uncle Sam has a bit of New Year's cheer: on income tax cut for almost every American worker. But for most taxpayers, it may bring one to a hangover that's likely to last for the bulk of the year.
Starting today, thanks to the $18.7 billion tax bill passed by Congress last October, the typical American family will enjoy a visible cut in federal income taxes.
And, thanks to the lawmakers' action in late 1977, Social Security payroll taxes will go up substantially beginning today -- particularly for those earning more than $17,700 a year.
At the same time, however, the impact of inflation in raising pay scales will push million of wage-earners into higher tax brackets offsetting much of income tax cuts Congress enacted.
The result is that with taxes and inflation combined more than 80 percent at the nation's 88.5 million taxpayers will face a net tax increase effective with this week's pay period. Only 16 million actually will come out ahead.
Although the tax-cut bill was designed to offset the impact of inflation and higher Social Security taxes, the lawmakers gave so much away in other tax breaks they had only enough money left to cover part of the rise.
With all things considered, the only Americans to enjoy a net reduction in federal taxes will be those in one-earner families with incomes of less than $19,000 a year -- and even that won't hold true for every lower-wage bracket.
The rest will face not tax hikes -- after taking account of inflation and Social Security -- ranging from $4 to $329, depending on the income bracket.
The increase in Social Security taxes comes in two parts:
First, the tax rate used to compute payroll taxes will rise from last year's 6.05 percent to a 6.13 percent. And, the maximum earnings on which Social Security taxes are levied will jump from last year's $17,700 to $22,900.
That means, first, that the Social Security "contribution" each worker pays will jump to a new maximum of $1,403.77 for workers making $22,900 or more, a rise of $332.92 from the previous high of $1,070.85.
It also means that workers paid $17,500 or more -- the maximum wage base last year -- will contiue to see Social Security taxes taken out of their paychecks well beyond the cut-off point they became used to.
For example, in the case of a worker paid $19,500 last year, an employer was required to deduct Social Security taxes for 47 weeks. This year it will be 52 weeks. For a $33,800 worker, the period will jump to 35 weeks, from 27 weeks.
The cut in federal income taxes will come in several ways: The $750 personal exemption for each taxpayer and his or her dependents will be boosted to $1,000; the standard deduction will be raised. and tax rates will be slashed.
The reductions, which average 7.2 percent for all taxpayers combined. will amount to between $22 and $1,002, depending on he taxpayer's income breaket Withholding rates for workers' paychecks will drop effective today.
For a typical family of four earning the median income of $15,000 a year, the reduction will amount to $97. For the same family making $30,000, the cut will be $315. At $100,000. It's $1,002.
There also are some other key changes affecting workers and employers:
Effective today, the federal minimum wage goes up 25 cents, from the $2,65 an hour to $2.90 -- boosting earnings for almost 5.3 million low-wage workers such as laborers and domestics.
The new "earned income" tax credit for the poor rises to a maximum $500, up from $400. And, in a new move, those too poor to benefit from a tax credit will receive cash payments through the withholding system.
Employer taxes also will go to up sharply, reflecting both a rise in companies' share of Social Security contributions and higher unemployment insurance costs. CAPTION: Chart 1, The Impact of Inflation Pushing Taxpayers into Higher Income Brackets; Chart 2, no caption, By Bill Perkins -- The Washington Post