For a number of reasons I do not like our current tax system, which probably won’t change any time soon. However, I have a question about if it is possible to change two aspects of it. They are related, but different enough that I am asking about each one separately.
First, it would be nice if the government would take out the right amount of income taxes the first time so that we wouldn’t have to worry about filling out tax forms or hiring accountants to fill them out to see if we owe, or are owed money. Is there a way to do that or is filling out forms like a 1040 inherent in our tax system?
Second, when I had a job I would occasionally hear about coworkers who would work a lot of extra hours to make overtime pay only to make too much money, be bumped up a tax bracket and actually make less. Now I’ve heard that they really don’t lose the money, they’ll just get a bigger tax refund, but the problem is they have to wait until after April of next year to get the money, and they needed the extra money for the current pay period. Is there a way to fix that under our current tax system or again, is it inherent and just something we have to put up with?
First, this has nothing to do with a progressive tax system, but is inherent in a system that allows deductions. The government has no way of knowing how many children you are claiming, or what mortgage interest you’ve paid, or how much your charitable giving is. It doesn’t even know your income, because most people in this country have other sources of income than their main, full-time job. If you run a small business on the side, you have lots of business deductions that can change wildly that the IRS has no way of knowing.
Second, the progressive tax code means that brackets start at certain levels of income. To simplify, you may owe 25% on your first $25,000, 35% on $25,001 to $50,000, and 40% over that. If you start earning $60,000 total, you only pay 40% on that last $10,000, keeping $6,000. It is therefore impossible to make less by earning more.
How this plays out on any individual’s take-home and refund would depend on that individual’s withholding structure, which can be changed during the year.
First, for anybody wondering why you mentioned a progressive tax system, I did have that in there, but thought it might sound to GD like, so I took it out because I’m only interested in factual answers and don’t want this thread to move to GD.
And for my second question in the OP, I’m talking about single paychecks. The amount of taxes taken out varies depending on the size of the paycheck. So sometimes people bump up a single paycheck into the next tax bracket and more is taken out then would have been. I’ve never had this problem, but I’ve heard plenty of people complain about smaller paychecks after working lots of extra overtime.
I mostly agree with your post, but there’s a flaw in this comment. I’ll use my mother as example (a nurse) - after a ludicrously low pay bump ($.15/hr, I think), her tax rate reduced her annual take-home a bit. Also, When I received my last double-digit pay increase, deductions for things like school loans were denied me at the Federal level - I make too much to claim them, without consideration that I lived in a high cost of living area in which that salary was not terribly high; that cost me a few thousand dollars.
Just to be clear, you’re saying that after the raise, way more estimated tax was withheld than necessary, so she had lower take home (after withholding) but more than got it all back in a refund at the end of the year? That’s possible, but your mother could also have fixed it just by asking for less to be withheld (it’s a form with about three spaces to fill out. Not hard).
If you’re saying that at the end of the year, she had less after-tax income because of the raise, then you’re wrong. Tax rates don’t work that way.
Your own example shows how other factors can make a difference. With 200 million taxpayers and the endless array of FICA, state and local taxes, health and retirement deductions, and all the rest that comes out of a paycheck, I can’t deny that some individuals will see different results. But if we’re limiting the hypothetical to nothing but federal taxes, then this is mathematically impossible.
Something I figured out a long time ago is that I can control how much money is taking out of my paycheck for taxes. Don’t want to wait for a big refund in April? Have more money taken out of your check during the year. Since my income hasn’t changed much in the past few years I have been able to reduce the refund I was getting and get pretty close to almost nothing additional owed, almost nothing refunded… I assume that everyone plays this game.
As others have stated, there’s a lot of people who simply do not understand marginal rates, and if they are claiming they got a smaller paycheck after working overtime than they normally get, they’re wrong. It doesn’t work that way.
However, let’s say I get $2,000 every two weeks for $52 grand in salary. That means I pay 10% tax on my first $9,000 of income, 15% on the next $25,000 of income, and 25% on my remaining income.
If my boss gives me a large bonus for my excellent work in explaining marginal rates (I’m always on the job!) my next paycheck might reflect $6,000 of pay, making it temporarily look like I have an annual income of $150,000 plus. That $6,000 will have a proportionate amount of taxes taken out as though I was much more wealthy and paying more taxes.
Once the end of the year comes, I will only owe taxes on the $56,000 I made that year. The “overpayment” of taxes on my bonus will be refunded to me.
But at no time did I lose any money to “bumping up” to a higher marginal rate. Also, if I get bonuses during the year, I can always adjust my withholding during the year so that if I get the bonus in July, I will pay less in taxes from August to December and “get my refund” early by spreading it out over less money withheld from my normal paycheck.
ETA: Oh yeah, nobody has to wait until “after April” to get their refund. I file my taxes as soon as I get my documents together, which is usually in late January. File electronically and the refund usually arrives by mid-February or thereabouts.
When it comes to an income tax system it can’t be both simple and fair. Pick one.
Expano did a good job of covering the basics. If it was a country of one person, one job, throughout the entire year then the deductions would be correct every time. Life is not like that. What about people that lose a good paying job during the year? Or they take a much better paying job. What about the person who has the one job throughout the year but the household income changes due to something that happens with the spouse? You can’t expect the employer to know these things. The use the standard withholding table. The onus is on the employee to make sure that taxes are withheld at the correct rate but few want to go to the trouble. If you under-report you can be subject to penalties (the gubbmint don’ts wants to wait fer der munny).
The end result is that to try to make the system fair it gets very convoluted.
The government doesn’t take money out of your paycheck, your employer does. Complain to them.
As others have said - it doesn’t work like that. If people consistently have that problem, they should consider telling their employer to stop taking so much out. Usually, this is done by adding a dependent or two to your file. You don’t get to keep everything - you still have to properly fill out your 1040 at the end of the year - but you’ll have had access to your money for a longer period of time.
Let me add another 'bullshit" to the chorus of people saying that getting less money when bumped to another tax bracket is a myth. Mt teacher said this once, and my Father sat me down and explained that it could not and did not happen. That’s the day I started to doubt what I was told in school.
This sort of pervasive information makes it hard to have an intelligent debate on taxes. For example, the recent bill passed by the House provides a tax break to every taxpayer, not just those below $250,000.
Where I did I say the word “fair”? That’s a GD topic. I just wanted to know if was possible to have the right amount taken out each time so we wouldn’t have to fill out forms at the end of the year. Apparently the GQ answer is no.
They take out money based on government rates. Not whatever they feel like taking out.
False. They can, in fact, take out whatever they (as approved by you) feel like taking out. The government has never said, “You must take out X%” (or more accurately, “a certain percentage as per this handy marginal tax chart”). They say, “you know, it would be really convenient for the government and your employers if you withheld income taxes along with the required social security et al. from their paychecks, because come next April, they’re unlikely to have X% (or more accurately…) laying around to send us”.
If an employee decides “hey - you know, I WILL have X% laying around in April, because I have better things to do all year with the money I’ve earned then send it to government for them to earn interest on instead of me. I’m going down to Human Resources and telling them my wife just had octuplets and to stop taking any income tax out of my paycheck”.