In this week's series about the possible fiscal cliff, we're talking about all the things that will happen if Congress doesn't make changes before the end of the year. The part that will have the most immediate impact on all working Americans is an increase in their income taxes. This increase will occur through a variety of changes, mostly expirations of previous tax cuts. While paying more taxes isn't always easy, this is a pretty easy change to explain thoroughly. I will not hit on every possible change, just the ones that will affect most military families. Because it is a lot of information, I'm going to do it in two parts. Today: Social Security taxes and income tax rates. Tomorrow: The Child Tax Credit and the Alternative Minimum Tax.
Once again, I must remind you that this is the current situation as of Wednesday, 21 November 2012. Congress has the ability to change this at anytime, and they have been known to make changes well into December. I will be sure to keep you up-to-date on changes as they occur. Also, I am not a lawyer or an accountant. I'm just a military spouse who is super-interested in this geeky money stuff. Please seek professional advice for things that you don't understand or that will have a large impact on you.
Return to Full Social Security Taxes
For the last two years, American workers have been paying a reduced rate of Social Security taxes. The regular Social Security tax rate is 6.2% of income for workers, plus an additional 6.2% contributed by employers. For the 2010 and 2011 tax years, the Social Security tax rate was temporarily reduced to 4.2%. This temporary reduction is currently scheduled to expire on 31 December 2011. If there are no changes, the Social Security tax rate will return to 6.2% on 1 January 2012. What will this mean for you? More Social Security taxes taken out of your paycheck, and less money coming home to you. Some examples, based on 2012 pay rates because we don't know for sure yet what 2013 pay rates will be:
Example one: For an E-5 with 6 years of service, the full rate i $165.06 per month in Social Security taxes. This is $53.25 more than the reduced Social Security tax rate of $111.81.
Example two: For an O-3 with 6 years of service, the full rate is $326.85 per month in Social Security taxes. This is $105.43 more than the reduced Social Security tax rate of $221.42.
Example three: For an E-8 with 20 years of service, the full rate is $295.53 per month in Social Security taxes. This is $95.33 more than the reduced Social Security tax rate of $200.20.
Example four: For an O-5 with 20 years of service, the full rate is $508.36 per month in Social Security taxes. This is $163.00 more than the reduced Social Security tax rate of $344.36.
These are direct decreases in your amount of take-home pay, and are not impacted by other taxes or credits. These are actual numbers, using 2012 pay charts.
Return to Previous Federal Income Tax Rates
Our country's federal income tax rates have always moved up and down over the years. The last major change was in 2001, when tax rates were pegged at their current rates. These rates were set to expire in December 2010, but Congress then voted to extend them until December 2012.
The current marginal federal income tax rates, and their appropriate income brackets fro 2012, are:
| Current Tax Bracket | Married Filing Jointly | Single | Head of Household | Old/New Tax Bracket |
|---|---|---|---|---|
| 10% | $0 – $17,400 | $0 – $8,700 | $0 - $12,400 | 15% |
| 15% | $17,400 – $70,700 | $8,700 – $35,350 | $12,400 - $47,350 | 15% |
| 25% | $70,700 – $142,700 | $35,350 – $85,650 | $47,350 - $122,300 | 28% |
| 28% | $142,700 – $217,450 | $85,650 – $178,650 | $122,300 - $198,050 | 31% |
| 33% | $217,450 – $388,350 | $178,650 – $388,350 | $198,050 - $388,350 | 35% |
| 35% | Over $388,350 | Over $388,350 | Over $388,350 | 39.6% |
Keep in mind that our country uses a marginal tax system, which means that you pay the lower rates on the lower amounts of income, and only pay the higher rates on the amount of your income that exceeds the lower brackets. For example, if you were married filing jointly and had $20,000 in taxable income, you would pay 10% on the first $17,400 and 15% on the remaining $2,600. It continues to work the same way up the brackets.
U.S. income taxes are calculated on taxable income, which includes a wide variety of adjustments and deductions from actual income. This makes it harder to give good examples of how changes to the tax rate will affect individuals. I'm going to make some extremely simple examples to illustrate what the impact could be on some imaginary taxpayers, but none of these examples will fit your situation because every taxpayer has different adjustments and deductions.
Example one: single sailor, E-5 with six years of service. No adjustments to income, and only the regular exemptions and deductions:
| Item | Amount |
|---|---|
| Income | $31,946 |
| Standard Deduction | $5,950 |
| Exemption | $3,800 |
| Taxable Income | $22,196 |
| Current/Lower Tax Due | $2,894 |
| Old/New/Lower Tax Due | $3,329 |
| DIFFERENCE | $425 |
Employers would automatically adjust withholding to a new chart based upon the higher income tax rates, so you might not be paying more/getting less back at the end of the year.
Example two: O-3 with six years of service, married with one child. No other adjustments to income, standard deductions and exemptions.
| Item | Amount |
|---|---|
| Income | $63,264 |
| Standard Deduction | $11,900 |
| Exemptions | $11,400 |
| Taxable Income | $39,964 |
| Current/Lower Tax Due | $5,125 |
| Old/New/Lower Tax Due | $5,995 |
| DIFFERENCE | $870 |
Example three: married soldier, E-8 with 20 years of service, two children. No adjustments to income, and only the regular exemptions and deductions:
| Item | Amount |
|---|---|
| Income | $57,192 |
| Standard Deduction | $11,900 |
| Exemptions | $15,200 |
| Taxable Income | $30,092 |
| Current/Lower Tax Due | $3,644 |
| Old/New/Lower Tax Due | $4,514 |
| DIFFERENCE | $870 |
Example four: O-5 with 20 years of service, divorced with three children, filing head of household. No adjustments to income, and only the regular exemptions and deductions.
| Item | Amount |
|---|---|
| Income | $98,388 |
| Standard Deduction | $8,700 |
| Exemptions | $15,200 |
| Taxable Income | $74,488 |
| Current/Lower Tax Due | $13,267 |
| Old/New/Lower Tax Due | $14,702 |
| DIFFERENCE | $1,435 |
As you can see, these two changes would have a large impact on taxpayers. Just researching all this made me feel a little queasy. And there's more...tomorrow I'm going to talk about the Child Tax Credit and the Alternative Minimum Tax.
This is complicated and sometimes confusing stuff. Please let me know your questions, and let me know if you see any errors. I've proofed this over and over, and it is making my head hurt. AND I lost it all once in some sort of flukey-server mishap.
Keep in mind that it is likely that Congress is going to make some changes so that these things don't happen. However, their changes may not mean that things return to their old ways, either. What a mess!
Also in this series:
