Political  Calculations

How much money will Uncle Sam allow you to keep from your paycheck in 2013 in the form of federal income taxes?

Thanks to the so-called "fiscal cliff" standoff in Washington D.C., the answer, for now, is exactly the same as you would have taken home in 2012. That fact will hold true even if the reported deal struck and passed in the U.S. Senate early on 1 January 2013 is passed by the House of Representatives later in the day.

That's because President Obama has previously directed the IRS to not issue any change in the directions it provides for withholding income taxes from individual paychecks to the nation's employers until a deal is finalized. As a result, the rules that the IRS issued for employer withholding taxes in 2012 will continue to remain in force, at least for the time being.

And because those same withholding tax rates, income thresholds, personal exemptions and allowances will continue to apply into 2013, the amount of money that the U.S. federal government will take from your paycheck represents roughly a 2.6% increase over what it would otherwise be, thanks to the return of bracket creep for the first time in nearly 30 years.

That means that 2013 will mark the first time since 1984 that the corrosive effect of inflation upon personal income will be allowed to affect the amount of taxes withheld from individual paychecks.

While bracket creep specifically refers to the situation where individuals suddenly find themselves paying higher levels of taxes even though their inflation-adjusted income may not have increased at all, in this case, it will affect every working American who has federal income taxes withheld from their paychecks because the IRS' inaction also means that the size of the personal exemption and withholding allowances that they might claim through their W-4 form is not being increased to account for the effect of the inflation that has occurred since 2011.

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.


Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!