Despite fiscal-cliff rescue, paychecks will get 2% smaller

Social Security 'tax holiday' allowed to expire January 1

Published On: Jan 30 2013 12:17:58 PM EST   Updated On: Jan 01 2013 08:35:45 PM EST
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JACKSONVILLE, Fla. -

Even if the U.S. House agrees to the "fiscal cliff" rescue bill the Senate passed in the wee hours of New Year's Day, most American's paychecks will get smaller.

One thing the Senate did not include in its last-minute bill avoiding automatic tax hikes and spending cuts is an extension of the "payroll tax holiday" implemented in 2010 to help stimulate the economy. The provision reduced the Social Security withholding for everybody earning under $110,000 a year from 6.2 to 4.2 percent.

For someone earning $35,000 per year, that 2 percent break saved about $700 per year in taxes.

"That's a difference in like a tank of gas a week, every week, coming out of my paycheck," taxpayer Lorilee Lomoguze said.

Nobody knows what the long-term effects of the fiscal cliff-debate will be, but extending the Social Security break doesn't appear to be up for discussion since it diverted money that kept the nation's retirement trust fund solvent.

Financial adviser Joe Krier says if the "Bush-era" tax breaks prevail for most Americans in the fiscal-cliff rescue package that ultimately passes Congress, this would be the only increase most taxpayers would experience and it shouldn't damage the economy.

"The economy can absorb this, and maybe a little bit more," said Kreir, of Krier Wealth Management. "Things are picking up. We're seeing the housing market pick up and different parts of the economy pick up, so there is room to absorb some stuff, and they just can't let this go because this is the tax that funds Social Security and Medicare."

Other economic analysts believe this 2 percent withholding increase could hurt the economy by shaving almost a percentage point off of total economic output in 2013 and cost the economy as many as one million jobs.