Surprised by New Marginal Tax Brackets

[livingdeb]

Although my salary, benefits, and voluntary deductions did not change, my paycheck was a bit lower this month than last month. It turned out to be due to an increase in the withholding tax (federal income tax). I hadn't heard about any changes to the tax rates. In fact, usually I expect the tax brackets to change slightly from one year to the next to take inflation into account, thus leading to a slightly higher take-home pay. That is not happening this year.

Here are the taxes withheld from paychecks annually for a single person:

2009
0%: $0 – 7180
10%: 7180 – 10,400
15%: 10,400 – 36,200
25%: 36,200 – 66,530
28%: 66,530 – 173,600
33%: 173,600 – 375,000
35%: >375,000

2010
0%: $0 – 6050
10%: 6050 – 10,425
15%: 10,425 – 36,050
25%: 36,050 – 67,700
27%: 67,700 – 84,450
30%: 84,450 – 87,700
28%: 87,700 - 173,900
33%: 173,900 – 375,700
35%: >375,700

You now hit the 10% and 25% tax rate earlier (with less money) and the 15%, 33%, and 35% brackets slightly later. There is also a new 27% tax rate that hits you just after the old 28% tax bracket used to. Then all of a sudden there's a tiny range of a new 30% tax rate. Then you go back to owing 28% for a while.

Anyone trying to make so little money that they don't have to pay any federal taxes at all now has to live on $6040 compared to $7180 last year. (Well, I've heard of at least one guy like that.)

Anyone making $6051 to about 67K will be paying higher taxes. And anyone making more than that will be paying lower taxes. I bet most people wouldn't expect that from an Obama administration. The differences are small, though if you're making only $8K, paying an extra $113 might not seem that small. (I believe $9.41/month can now equate to 18 boxes of macaroni and cheese.)

At least these tax changes did not happen mid-year, but that doesn't mean there's not any idiocy afoot: the tax is no longer totally progressive. Anyone making more than $87,700 will be paying a lower percentage (28%) on some or all of that extra money than on the 84,450th – 87,700th dollars (30%).

Comments

Partial Explanation

[livingdeb.livejournal.com]

Don't Mess with Taxes (http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2010/01/new-year-new-withholding-amounts.html) explained why the tax brackets moved downward for lower-income folks but not upper income folks. It's because the Making Work Pay credit is being pulled evenly from paychecks all year round instead of starting in April like last year. I guess I would expect that from the Obama administration after all.