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.
But then, those are the income tax increases that most people are unlikely to notice on their paycheck. By contrast, they won't be able to help but notice that the size of the take-home portion of their paychecks is shrinking by 2% of their income thanks to the expiration of President Obama's temporary "stimulus" Social Security payroll tax cut, which isn't affected by the "fiscal cliff" standoff over federal income taxes. Here, the Social Security tax rate on personal income will return to 6.2% from its 2012 level of 4.2%, no matter what happens with the fiscal cliff situation. [There is no change in the portion of Social Security taxes paid by U.S. employers, who have continued to separately pay 6.2% of their employees' income to Social Security - Social Security has been running deeply in the red in part due to President Obama's "stimulus" tax cut.]
Our tool right here reveals what your paycheck, minus any state income tax withholding, will look like for now in 2013.
We'll update our tool once Washington D.C. gets its act together.
Speaking of which, if you want to find out how much federal income taxes would be being withheld from your paycheck in 2013 if not for President Obama's bracket creep, or to find out how much higher they might be if no deal is ever reached and the IRS has to go back to the income tax rates of 2001, our tool "Your Paycheck Over the Cliff" will answer those questions for you.
We've been in the business of calculating people's paychecks (not including state income tax withholding) since 2005!
But before we forget, your employer pays a lot more to keep you on the payroll than just your paycheck! The tool below shows how much it costs to employ you in 2011-12!
And you should also be aware that the employer's portion of Social Security and Medicare taxes (aka "FICA" taxes) have replaced corporate income taxes almost dollar-for-dollar over the years. Don't let anybody pull the "U.S. corporations aren't paying a fair share of taxes" line with you - they're really paying almost exactly the same share of all U.S. taxes that they have been for the last several decades!
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
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