PLUS AND MINUS
Four scenarios for adding state income tax hike, subtracting federal cut, both temporary measures:
For a single individual with one child and wages of $60,000, the state income tax owed will increase by $1,120 from $1,680 to $2,800, while the Social Security tax will fall by $1,200 this year from $3,720 to $2,520. The net change is $80 less in taxes.
For a single person with no children and $30,000 in wages, the state income tax will rise by $560 from $840 to $1,400, while the Social Security tax will drop by $600 to $1,260 from $1,860. The net change is $40 less in taxes.
For a retired couple with income of $60,000, the state income tax will rise by $80 from $120 to $200 for a net change of $80 more in taxes.
For a married couple with two children and wages of $100,000, the state income tax would rise by $1,840 from $2,760 to $4,600, while the Social Security tax will fall by $2,000 from $6,200 to $4,200. The net change will be $160 less in taxes.
Sources: JMB Financial Group Ltd. and CCH Inc. Numbers do not include deductions and exemptions. They also do not reflect the impact of the end of the Making Work Pay credit nor do they represent total taxes owed.
For many who expected that their take home pay would rise this year following the tax package signed into law last month, the excitement was short-lived — or will be when they account for the state’s income tax hike.
The federal tax packaged included a one-year reduction of employees’ Social Security tax rate from 6.2 percent to 4.2 percent. That savings will be largely wiped out by state legislators’ action last week spiking the Illinois personal income tax rate 67 percent from 3 percent to 5 percent. Many will see a bigger overall tax bill.
A married couple with two children and wages of $100,000 will see their state income tax increase by $1,840 from $2,760 to $4,600, according to Donald King, director of tax planning at JMG Financial Group Ltd. in Oak Brook. The Social Security tax will fall by $2,000 from $6,200 to $4,200, he said. That’s a net change of $160 less in taxes owed, when only accounting for those two items.
But when you also factor in the elimination of a key federal credit this year, which the Social Security tax decrease was supposed to help cushion the blow from, many taxpayers will now see a net increase in combined federal and state taxes owed, noted William Dever Jr., principal of the firm and a certified public accountant.
“For middle income working individuals or couples with or without children...if their total income is below $75,000 for a single person or (below) $150,000 for couples filing jointly, the $400 or $800 Making Work Pay credit has been eliminated,” Dever said. “The net effect of this will be a $400 or $800 overall tax increase.”
So for that family making $100,000, when factoring in the end of the credit, along with standard deductions and personal exemptions, the higher state tax and lower Social Security tax, their combined federal and state tax bill will rise by $427 from $10,823 last year to $11,250 this year. That is according to Phillip Schwindt, senior tax research analyst at Riverwoods-based CCH Inc.
“For an individual, who the bulk of their income is self-employment income or wage income, then they’re going to see federal savings wiped out by the Illinois increase,” Schwindt said.
For Illinois workers upset by the higher state rate, there will be more reason to be upset next year. That’s when the Social Security tax reverts back to the higher rate eliminating this year’s cushion.
Workers aren’t the only one’s who’ll be taking a hit due to the Legislature’s actions; corporations face a higher corporate tax rate. That rate goes from 4.8 percent to 7 percent.
“This is a 46 percent increase on corporations and a 67 percent increase on small and medium-size businesses that file under the individual rate,” said Mark Denzler, president and chief operating officer of the Illinois Manufacturers’ Association. “This makes Illinois less attractive to employers looking to either locate in the state or expand in the state. This is a cost that they have not factored into their budgets.
“Employers are going to have to take steps. In some cases, they may have to lay off employees. They may have to delay or stop the purchase of new equipment. In some cases, employers may be forced to increase prices. But that then puts them in a box because they are trying to compete with businesses in other states that don’t have to pay these higher taxes.”
Ron Bullock, owner of Bison Gear & Engineering Corp. in St. Charles, said after making staff cuts last year, following a 20 percent drop in sales, he doesn’t plan to make job cuts this year. But the tax increase will give him pause.
“We’ll certainly be a little more cautious about adding staff,” he said.