April 15 has come and gone, and most Americans have fulfilled their duty to the IRS for the year. But even with that task behind them, American taxpayers still haven't managed to earn enough money this year to pay off all the taxes they'll owe in 2013.
The nonprofit Tax Foundation came up with the concept of Tax Freedom Day to make it clear just how long Americans have to work just to pay their overall tax burden to federal, state, and local governments. The concept is simple: When you take the total amount of all the taxes that people have to pay and then divide it by their income, you can figure out what percentage of the year you spend working to earn enough to pay your share of those taxes.
This year, Tax Freedom Day for America as a whole won't come until tomorrow, April 18. That's five days later than it was last year. Let's look at three of the reasons why you still haven't managed to get free of the tax man this year, and why things could get even worse in the future.
1. Higher payroll taxes on Social Security.
At the beginning of 2013, the temporary tax holiday on Social Security taxes expired. As a result, payroll taxes rose from 4.2% to 6.2%.
Because Social Security taxes apply only to a maximum of $113,700 in earnings for 2013, not everyone saw their overall taxes go up by 2 percentage points. But for those who fall under that threshold level, paying 2% more of your income toward payroll taxes effectively means that you're working more than an extra week this year to get them paid.
2. Higher marginal rates on high-income taxpayers.
Even though high-income taxpayers don't bear the full brunt of higher payroll taxes, they don't get off scot-free. Increases in the highest marginal rates for single taxpayers making $400,000 or more and joint filers with more than $450,000 in income amount to 4.6 percentage points for ordinary income and 5 percentage points for dividends and capital gains.
Those higher rates only apply to the amount of income above those threshold levels, so taxpayers won't have to work 4.6% to 5% of the year paying their extra share. But taxpayers with incomes substantially above the thresholds can expect to work several extra days to pay it off, with some extreme cases involving two weeks or more of extra work.
3. New tax surcharges on high-income earners.
Moreover, high-income earners face some brand-new taxes this year. For single filers earning more than $200,000 and joint filers above $250,000, two new tax surcharges could increase your tax bill. For wages and other employment income, a 0.9% tax applies to amounts above those thresholds. Moreover, if you have investment income that when added to your other income puts you above those levels, you'll have to pay an investment-income tax of 3.8%.
Again, how much those taxes will add to individuals' tax burden depends on their exact income breakdown. But for many high-income earners, the taxes could add days or even a week or more to the length of time they work for Uncle Sam.
Moreover, more tax increases look likely to hit ordinary Americans in the near future. Amazon.com (NASDAQ:AMZN) has been making agreements with an increasing number of states to collect sales tax on online purchases, and a federal law could subject Amazon, eBay (NASDAQ:EBAY), and other online sellers with the obligation to collect taxes. That has helped Best Buy (NYSE:BBY) and other competing brick-and-mortar retailers, but it means consumers pay more in overall tax. Technically, most taxpayers already owe uncollected sales taxes to their respective states, but few states enforce those provisions vigorously. With state and local sales taxes representing 12 days' worth of the average American's tax burden, increases would have a small but significant impact on many people.
So when tomorrow comes, be sure to celebrate your freedom from taxes for another year. But as you start to earn money for yourself, keep in mind that you could be working even longer for the tax man in 2014.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.
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