InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. adjustments for tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. , exemptions, and deductions will mean that your first paycheck in 2008 will be slightly higher than your last paycheck of 2007, even if your salary remains the same. While the increase this January will not be nearly as large as last January, it will still be noticeable.
For a single person earning $50,000 per year (assume all wages/salaries and no adjustments), his federal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. bill under 2007 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. parameters would be calculated as follows:
AGI = $50,000
Taxable IncomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. = AGI less Standard DeductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. ($5,350) and Personal Exemptions ($3,400) = $50,000 – $5,350 – $3,400 = $41,250
Income Tax Before Credits = Tax Paid at 10% Rate + Tax Paid at 15% Rate + Tax Paid at 25% Rate = (($41,250 – $31,850) * .25) + (($31,850 – $7,825) * .15) + ($7,825 – 0) * .10) = $2,350 + $3,603.75 + $782.50 = $6,736.25
Credits = 0 (we assume no credits)
Income Tax After Credits for 2007 tax law = $6,736.25
Now for a person earning $50,000 under the 2008 tax parameters:
AGI = $50,000
Taxable Income = AGI less Standard Deduction ($5,450) and Personal Exemptions ($3,500) = $50,000 – $5,450 – $3,500 = $41,050
Income Tax Before Credits = Tax Paid at 10% Rate + Tax Paid at 15% Rate + Tax Paid at 25% Rate = (($41,050 – $32,550) * .25) + (($32,550 – $8,025) * .15) + ($7,825 – 0) * .10) = $2,125 + $3,678.75 + $802.50 = $6,606.25
Credits = 0 (we assume no credits)
Income Tax After Credits for 2007 tax law = $6,606.25
The person would save $130 on the year assuming no pay change, which would be about a $5.42 pay increase per pay period (assuming two per month).
Note also that inflation adjustments do reduce somewhat any growing income gap between those whose real incomes did not grow as fast as others as higher exemptions and deductions make the tax system more progressive.
Finally, a pay raise will not apply to some of those who live in Maryland as paychecks for high-income Marylanders are set to shrink significantly starting Jan. 1, 2008 thanks to the recent tax hike approved by the legislature and Gov. O’Malley. Those not high income in Maryland may see higher paychecks thanks to a slight increase in the exemption amount, but they will see higher taxes when they shop as the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. is going from 5 percent to 6 percent effective January 3rd.
Share this article