Editor, In response to Reggie Sage’s letter in Sunday’s edition, asking why the federal tax withholding went up on his recent retired pay statement, I may have the answer. The same thing happened at my office, where I am responsible for our payroll.
The Tax Reform Act of 1986 that Ronald Reagan helped push through Congress included a provision that required the income tax withholding brackets to be indexed for inflation every year. That is, if inflation (which under Jimmy Carter’s term had shot to ruinous levels) increased by 5 percent in a year, income tax brackets were supposed to decrease by 5 percent the following year. That way, employees who got a Cost of Living Adjustment (COLA) to keep up with inflation didn’t pay higher taxes on that COLA. The intent was to keep their purchasing power level.
So every January since, working folk have seen a small decline in their federal income tax withholding as the individual tax brackets were adjusted for inflation. This January was an exception, because Congress failed to act until the very end of December to keep the tax rate reductions in place that President George W. Bush had gotten approved by Congress 10 years earlier.
Therefore, the IRS already had issued new tax withholding rate charts for employers and payroll services to use with payrolls made after Jan. 1, assuming tax rates would rise. That is why the federal withholding taxes increased. The payroll service our office uses has confirmed this for me and says that those withholdings will decrease as soon as the IRS issues the adjusted withholding charts.
— Rafe Semmes