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Updates for USA tax changes

Over the New Year period I was in the USA, watching with interest as the government there tried to resolve their tax and spending problem that was called the “fiscal cliff”. This cliff was due to the fact that many of their tax laws were due to expire at the end of 2012 and they had not yet agreed how to proceed for 2013. Tax years in the USA are the same as calendar years, starting on 1st January, so it was important that they reached a conclusion over the holiday period.

There is a US version of The Salary Calculator, and so I needed to know how to update it for 2013. Unfortunately, when the answer came, it wasn’t simple and it wasn’t very clear, either. As well as changes to some of the tax rates (including an increase for the top rate from 35% to 39.6%), there was an additional Medicare (health care) tax of 0.9% on those earning over $200,000 ($250,000 for married couples). There was also the re-introduction of old regulations which reduce the amount you can deduct before tax – Personal Exemption Phaseout (PEP) and “Pease” (reduction of pre-tax deductions named after the congressman who created it). PEP is similar to the personal allowance reduction which occurs in UK tax if you earn over £100,000 and applies to those earning more than $250,000 ($300,000 for married couples). Pease reduces pre-tax deductions such as charitable giving for those earning more than these same thresholds. The overall effect is to increase income tax revenue, largely from the upper middle class and the wealthy.

As well as applying these tax changes to The Salary Calculator, I also had to include something called Alternative Minimum Tax, which is used to make sure that taxpayers don’t use so many deductions and loopholes to reduce their tax burden below a certain percentage of their income. This had been in effect for a few years but was rising in prominence and the number of taxpayers it affects, so I was overdue in adding it.

All of this led to a significant amount of work, not least in finding reliable figures for the thresholds and rates which apply to all of these for 2013. Even though I believe I have found the latest ones, the US government is meeting again later in the year to discuss tax plans again, and it is possible that these figures or rules may even be changed again – if this happens I will update the US Salary Calculator with the latest information. To learn more about the tax calculations, see this page about the US Salary Calculator.

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None of the content on this website, including blog posts, comments, or responses to user comments, is offered as financial advice. Figures used are for illustrative purposes only.

Comparison of UK and USA take home

You may not know that there is a US version of The Salary Calculator which calculates take-home pay after income tax and Social Security (which is like the UK’s National Insurance). I thought it would be interesting to see how much of their salary our American cousins get to keep compared with how much we get to hold on to over here. I used an exchange rate of $1.59 to the pound, and the 2012 tax rates for both countries, to create this chart:

Comparison of UK and USA take-home pay

Click the image for a larger, interactive version

As you can see, in most cases the Americans get to keep more of their hard-earned cash than we do. The top rate of federal income tax is 35% in the USA, and they only start to pay that if they earn more than $398,100 in a year – compared with 40% tax in the UK if you earn more than £42,475 and 50% if you earn more than £150,000. Also, Social Security is charged at 5.65% of most incomes, compared to National Insurance which is calculated at 12% (although only above income of £7,605 per year). You might have heard in the news some people saying that the 50% tax rate makes Britain unattractive for wealthy business people – this is what they are talking about – if you could run the same business in the USA and pay tens or hundreds of thousands less in tax each year, you’d think about moving – making any British employees you have redundant and employing Americans instead.

However, before you start packing your bags, there are a few other things to consider. Firstly, you can see from this zoomed-in version of the chart that if you earn less than about £12,000 per year, you actually get to keep more of it here in the UK than you would in the US:

Zoomed-in version of the US and UK take-home comparison

Click the image for a larger, interactive version

Also, these calculations only include federal income tax and Social Security – most of the states charge separate income tax on top of what the central government takes, which The Salary Calculator doesn’t currently work out. Another consideration is that in the UK we can rely on the NHS to provide us with healthcare if we need it either for free or for a relatively small prescription charge, but in the USA health insurance can cost thousands of dollars per year.

Also, it can be difficult to get a decent cup of tea.

You can read more about US tax rates on The Salary Calculator (US).

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Thursday, March 29th, 2012 Foreign Currency, Income Tax 7 Comments

US tax can be complicated for same-sex couples

I was in the USA recently and was interested to see an article in the newspaper USA Today reporting that same-sex couples sometimes face extra difficulties when it comes to paying their taxes. In the US, although there is an equivalent to PAYE (where your employer deducts your tax for you), almost all taxpayers complete a tax return detailing their income, allowable deductions, and the tax they should pay. This might be more or less than what your employer deducted, so you may have to pay the difference or request a refund.

The problem for same-sex couples occurs because of two details of the American tax / legal system. Firstly, married couples can file a joint tax return, rather than filing two separate returns. Filing a return can be a laborious process, and sometimes it is necessary to pay a tax consultant to complete it for you, so filing only one can save time and money. Sometimes, filing a joint return actually leads to less tax being owed, an obvious benefit. Secondly, same-sex marriage is not recognised by the federal government (i.e. the country) but is recognised by some states (e.g. Massachusetts). What this all adds up to is same-sex couples having to file different tax returns at the state and federal levels – a joint return for their state (if it allows them to submit joint returns) and separate returns for the federal government. This can cost couples more in tax consultant fees (as there are more forms to submit) and can cost them more in tax as they miss out on the tax benefits of being a married couple.

At the moment it doesn’t appear that this problem is going to go away – not soon, in any case. You can learn more about US Federal Income Tax on the US Salary Calculator.

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Sunday, February 26th, 2012 Foreign Currency, Income Tax No Comments

Pound’s Euro rate improves

With the economy having improved over the last couple of months, and many people last year choosing to have a cheaper holiday and stay in the UK, perhaps this year there’ll be more of us thinking of treating ourselves to a trip to Europe this summer. And if you’re one of them, good news – over the last few weeks the Euro exchange rate has improved significantly!

Although €1.20 to the pound is not what you might consider a great rate, it’s not been at that level since the pound plummetted at the end of 2008. Unfortunately, it’s not all good news – this improvement is not due to the pound getting stronger but the Euro getting weaker – the pound continues to fall against the Yen and the Dollar (although it has seen a recent rally on this last count). The BBC’s Gavin Hewitt has written a great blog post explaining why the Euro is in such trouble.

When will the pound return to its previous strong position? Well, the rates we remember of a few years ago such as 2 dollars to the pound are not going to return anytime soon, but if confidence in the UK economy increases then investors will value the pound more. An increase in UK interest rates would also give a boost (since saving pounds then becomes more worthwhile) – but this would impact on mortgage interest rates for a lot of homeowners. Would you rather find it easier to pay your mortgage every month, or have a bit extra holiday money in the summer?

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Friday, June 11th, 2010 Foreign Currency 3 Comments

Healthcare in the USA

Another thing that is being mentioned a lot in the news in the States at the moment is universal healthcare. They don’t have an equivalent of the NHS that we have in the UK, to get healthcare in the US you need to have health insurance. Just as with car insurance or travel insurance, the more you pay the better coverage you get – the cheaper insurance policies will have high excesses (the amount you have to pay in the event of a claim) and may not cover all treatments.

The cost of insurance has been going up in recent years, and more and more Americans can’t afford to have any insurance at all. Small businesses are also finding it difficult to provide healthcare for their employees, as they can’t negotiate big discounts with healthcare providers. The number of Americans without insurance has been increasing, and although hard numbers are difficult to find (different organisations count the uninsured in different ways), this study claims that it could be as many as one in three are uninsured.

President Obama is pushing for healthcare reform which would cover all Americans with a government-run system, the cost of which is estimated at $611 billion. That’s a lot of money, and it could hit American taxpayers for years to come. However, it may end up costing them less than the private insurance route – as this Wikipedia article says, more is spent per person for healthcare in the US than in any other country – a centralised approach may be more efficient.

What relevance does this have for us in the UK? I believe that healthcare reform could help improve the US economy, and as I said in my last post, that will help bring the world out of recession. Why do I think this? Small businesses in the US are struggling in the current economic climate – they are having to cut healthcare benefits for their employees, or face increasing costs. Citizens with insurance spend less time being ill (as they get better treatment, or indeed any treatment, and also can take preventative measures like regular check-ups) and therefore take less time off work and are therefore more productive. With the burden of providing healthcare for employees lifted, small businesses and family-run businesses should be able to weather the storm of the global recession, and turn a profit sooner.

This is all assuming that the cost of medical insurance as it is currently is higher than the increased taxes that will be required for government healthcare to be provided. This is by no means certain, and of course, health insurance is optional but taxes are not!

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Tuesday, July 7th, 2009 Economy No Comments

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