Posts Tagged "taxes"

How China Trade Affects Social Security

shipping containersIf you don’t know this fact about Social Security, join the club. The percentage of earnings for all
U.S. workers combined that is subject to the Social Security payroll tax is falling. Growing income inequality is the reason.

Thirty-five years ago, Social Security taxes were levied on 90 percent of all workers’ earnings. By 2016, this taxable share of earnings had declined to 82.7 percent, according to federal data, and it will continue to drop over the next decade.

The payroll tax is 12.4 percent of an individual worker’s earnings, with half deducted from his paycheck and half paid by the employer. But the tax has a cap: once earnings reach $132,900 – the cap for 2019 – they do not have to pay the tax for the rest of the year.

This is where inequality comes in. Since incomes above the cap are growing much faster than regular workers’ incomes, a bigger share of earnings is escaping the cap every year.

The decline in the taxable share aggravates the existing problem that benefits being paid out by Social Security now exceed the tax revenues coming in.

A recent study identified growing U.S. trade with China as one important factor that is shrinking the share of earnings subject to the payroll tax.

China is now the largest source of U.S. imports. The increase in trade volume over several decades has contributed to U.S. income inequality by sharply eroding earnings for workers in the low-wage, low-skill industries that have lost factory jobs to China. But trade with China has actually been good for workers in the top 1 percent – their earnings have increased slightly. Think of the high-tech entrepreneur selling software to a Chinese manufacturer. These are the types of people who stop paying the payroll tax partway through the year, when their earnings exceed the cap. …Learn More

dollar art

Know About the Roth 401(k) Surprise?

Financial experts and writers often tout the Roth 401(k)’s main selling point: when the money is withdrawn in retirement, it won’t be taxed.

Well, that’s not entirely true.

An employee’s own money saved in his Roth account over the years is, indeed, shielded from income taxes when he retires and starts pulling out the money. That’s because the worker had paid the taxes before he put the money into the Roth.

But employer contributions to Roths are different. Employer contributions and any resulting investment earnings are taxed as income in the year that the money is withdrawn.

“Most everyone I talk to is shocked by this and surprised,” said CPA Sean Stein Smith, a business and finance professor at Lehman College in New York. Understanding the difference between the two types of savings plans offered to employees – Roth versus regular 401(k) – is already complicated enough, he said, and the tax distinction only adds to the confusion.

The reason withdrawals of employer contributions to Roths are not exempt from income taxes is because they are no different than employer contributions to regular 401(k)s. They are another form of income, just like your hourly wages. However, no taxes are deducted from a worker’s paycheck for Roth and regular 401(k) contributions when the employer puts them into the account. So the worker eventually has to pay the taxes – they are simply being delayed.

The next logical question is, how do you know how much you owe in taxes? What if you withdraw retirement income from both a Roth and a traditional 401(k) over the course of a year?

Figuring out the tax bite “is not your problem,” said Jaleigh White, CPA for a Louisville, Kentucky, investment firm and member of the National CPA Financial Literacy Commission for the American Institute of CPAs. …Learn More