I get asked a lot 'what does a tax increase mean for me?' This blog will discuss how a tax increase impacts you. In previous blogs I've discussed determining the right size for your business based on your personal household needs and obligations and I've talked about the potential for direct and indirect tax increases.
Without going into major differences (credit for efficient homes, kids) this post will discuss the major pure financial differences between a person that makes varying levels of income and the associated financial impact (e.g. how much will it cost you, how much more do you need to earn?)
In doing research for this post I had planned to recalculate income based on tax rates. As a quick refresher on the US Tax Code, we all pay a graduated income tax. This means that the tax bracket goes up the more that you make. However, it's not an absolute scale. When you bump into a higher bracket because you make more money, only the first dollar at the new tax rate is taxed at the new rate – every preceding dollar is taxed at the lower tax rate. For example, if you make $100,000, in today's tax code (assuming you're married filing jointly) your tax bracket looks like this:
- $0 - $17,000 – taxed at 10%.
- $17,001 - $69,000 – taxed at 15%
- $69,001 - $100,000 taxed at 25%
for a total tax of $17,250 and an effective tax rate of 17.25%.
So, any rate increases (other than taking deductions and credits away – therefore artificially increasing your income and increasing your amount of tax respectively) occur because a bracket is widened / shortened and / or rates change.
In my research, I came across a comparative rate calculator that seems to get pretty close. Effectively, at various income levels, the following is the potential tax impact (which ultimately means cash to you) – the first column is income, the second column is the old tax due at the respective income level, the third column is the tax due today, and the fourth column is the net cash impact:
|Income||Roll Back||Today||Cash Impact|
|$ 100,000.00||$ 22,300.00||$ 17,250.00||$ (5,050.00)|
|$ 150,000.00||$ 37,621.00||$ 30,070.00||$ (7,551.00)|
|$ 200,000.00||$ 55,049.00||$ 44,070.00||$ (10,979.00)|
|$ 250,000.00||$ 73,049.00||$ 59,955.00||$ (13,094.00)|
In all fairness, this is if the Bush Tax Cuts completely expire and tax rates are rolled back to 2000 levels. Most of the discussion today is about impacting the top tax brackets by a few percentage points and changing a few other things so it might not be quite this bad. The above represents the scenario if nothing changes and a full expiration happens in 2013.
To figure out what you need to make to overcome this increase without impacting your lifestyle you need to divide the cash impact by roughly 0.7 to 0.75 as this represents the additional amount you'll need to make – with the taxes grossed in – to make the same amount you make today. So, to feel like you're netting the same amount, at $100,000 today, you'll need to make $100,000 + $5,050 / 0.7, or approximately $107,500.
The following is a handy chart that shows the differences in brackets over the years:
So, what can you do? Well, vote (as policy makers you vote for set rates) but also be realistic that something needs to change (revenue up, massive expenditure down, or both) in our federal and state governments as what we have is likely not sustainable.