Most Americans' personal finances next year will be affected by inflation figures the United States government released Wednesday. Although the inflation rate remains low, the consumer price index (CPI) rose enough in the 12 months ending in September to trigger a series of adjustments in federal income taxes and social security.
One major change is that the nation's 36.6 million social security beneficiaries will see their checks rise 3.1 percent in 1986. It's the program's smallest cost-of-living increase in a decade.
The benefit increase sets in motion a boost in the wages subject to social security tax. With the first $42,000 of income subject to tax in 1986, the maximum annual social security tax bite on workers will top $3,000 for the first time.
Meanwhile, the Internal Revenue Service will use the same 12-month CPI figures to adjust various provisions of the tax code to offset inflation.
These provisions, to be adjusted as of Jan. 1, include per-person exemptions, the standard deduction, and withholding on wage and salary income. Tax brackets will also be widened so that more income is taxed at a lower rate. The adjustments will affect Americans' 1986 tax bill, which must be paid by April 15, 1987.
Because of these changes, people whose salaries in 1986 don't keep pace with inflation will enjoy a reduction in federal income taxes. But depending on a person's salary, that income-tax cut could be offset by higher social security taxes.
Those whose earnings equal or top the $42,000 cutoff for social security taxes in 1986 will see their social security tax bill climb from $2,791.80 in 1985 to $3,003 in 1986, a 7.6 percent increase. Part of the increased individual cost of social security is due to a previously scheduled increase in the tax rate from 7.05 percent this year to 7.15 percent on Jan. 1, 1986. Employers match the social security taxes workers pay.
By law, social security benefits are increased when the average consumer price level (as measured by that variation of the CPI relating to wage earners) for the July to September period is 3 percent or more above the average level for the same quarter in the previous year.
The 3.1 percent benefit hike that recipients will get means the average retired worker will see his monthly check increase $14 from the current $464. The maximum benefit for someone retiring this year at age 65 will climb $22 from the current $717.
For the average retired couple, the monthly check will climb $24 from the current $788.
For disabled workers covered by social security, the average check will climb $14 from the current $469.
Benefits will also be adjusted for persons receiving supplemental security income, a federal welfare program that helps the needy, aged, blind, and disabled. The maximum SSI payment for a single person will climb $11 from the current $325.
The maximum SSI payment for couples will rise $16 from the current $488.
The cost-of-living increase will cost the social security trust fund $5.8 billion in 1986.
To cover the cost of higher benefits, cost-of-living adjustments prompt the Social Security Administration to examine average wage increases. This is then used to adjust the income on which workers pay social security taxes. Average wages in 1984 rose 5.9 percent over 1983. This will be the figure used to increase the wages subject to social security tax in 1986.
This year 8.7 million workers are paying the maximum social security tax. Next year 7.3 million are expected to pay the maximum.
A slightly different inflation measure, called CPI-U (a variation of the CPI measure relating to all urban dwellers), is used to offset the effect of inflation on various federal income-tax provisions. CPI-U rose 3.7 percent in the past 12 months, the government said Wednesday.
Thus the current $1,040 personal tax exemption will be boosted by that amount, as will the standard deduction used by taxpayers who don't itemize deductions. The standard deduction currently is $2,390 for single people and $3,540 for couples filing joint returns.
At this writing the Treasury Department did not have precise new figures for the exemption and standard deductions.
The inflation news that triggered these changes remained relatively good. Consumer prices in September rose a scant 0.2 percent for the fifth month in a row. If last month's inflation rate persisted for a year, the yearly advance would be 2.3 percent. A rate that low would fall below the 3 percent level needed to trigger a social security cost-of-living adjustment. CHART: The growing cost of social security Year Taxable Earnings Tax Rate Maximum Employee Payment 1975 $14,100 5.85% $824.85 1976 $15,300 5.85 $895.05 1977 $16,500 5.85 $965.25 1978 $17,700 6.05 $1,070.85 1979 $22,900 6.13 $1,403.77 1980 $25,900 6.13 $1,587.67 1981 $29,700 6.65 $1,975.05 1982 $32,400 6.70 $2,170.80 1983 $35,700 6.70 $2,391.90 1984 $37,800 6.70 $2,532.60 1985 $39,600 7.05 $2,791.80 1986 TO COME 7.15 TO COME Source: Social Security Administration