As the Legislature and Gov. Robert Bentley wrangle over ways to reconcile the ailing General Fund, one option that may be offered again in a second special session is eliminating the state deduction for some FICA taxes on Alabama income tax returns.
FICA stands for Federal Insurance Contributions Act, which requires employers to deduct Social Security and Medicare taxes from your paycheck. The bill proposed by Gov. Bentley only affects the Social Security portion of the FICA withholdings.
Eliminating your ability to deduct the Social Security portion of FICA contributions from your state income tax would bring an estimated $182 million for the General Fund, which is in a $200 million hole. But just how much would eliminating that deduction add to your Alabama income tax bill?
Everyone's tax situation is different, but here's a rough calculation provided by Paul Poslajko, a CPA and senior consultant for the firm Beason & Nalley in Huntsville:
Take your income, let's say $100,000 just to make it a round figure, and multiply it by the percentage of your income that goes to the Social Security portion of FICA. That's 6.2 percent for Social Security (capped at $117,000). Then you multiply that by the state tax rate, roughly 5 percent. So, if you make $100,000, you would normally deduct about $310 from state taxes.
Let's look at the estimated FICA deduction for various incomes:
• $20,000 income = $62 deduction
• $30,000 income = $93 deduction
• $40,000 income - $124 deduction
• $50,000 income = $$161 deduction
• $60,000 income = $186 deduction
• $70,000 income = $217 deduction
• $80,000 income =
• $90,000 income = $279 deduction
If you want to figure it out based on your own specific income, grab your calculator (or pencil and paper) and do this: Multiply your taxable income by .062, then multiply the result by .05, and that's the Social Security portion of your FICA deduction. (Ex: $100,000 x .062 = $6,200. Then: $6,200 x .05 = $310)
What does all this math mean to you? If the Legislature considers Gov. Bentley's FICA tax proposal, it could be the difference between getting a small refund from the state or having to write a small check at tax time.
It also might mean that people who have itemized their state taxes to take advantage of the FICA deduction might just take the standard $2,500 deduction.
"For the person that's working and just has a W-2, they live in an apartment, they don't have estate taxes. they are not going to be over the limit to itemize," Poslajko said.
The bottom line is, the Legislature is either going to have to find new money for the General Fund or make cuts that Gov. Bentley has so far been unwilling to approve and even most of the Legislature doesn't want to make.
Correction: This post has been updated to reflect that Gov. Robert Bentley's proposal to eliminate the state FICA deduction only includes the Social Security portion, or 6.2 percent. Calculations below have been updated to reflect that Medicare withholdings would not be included.
Would you be willing to lose your FICA deduction as a way to avoid budget cuts to Medicaid, mental health, public health, courts and other agencies?