You're getting a (small) raise thanks to new tax law
By Kay Bell • Bankrate.com®

As of July 1, you probably got a raise.

Don't thank your boss. Thank Uncle Sam. The new tax cut bill, the same one that put an Internal Revenue Service rebate check in your mailbox, also will add a few extra dollars to some workers' paychecks.

Don't plan your spending spree just yet. For most taxpayers, the raise won't be much; certainly nothing to compare with the rebate checks, which range from $300 to $600. But some folks will notice a change for the better in midsummer paychecks, thanks to the legislation's next step: tax bracket reductions.

The law adds a 10-percent rate (which is being paid out this year in the rebates), keeps the 15 percent rate and cuts the four remaining top income tax brackets -- 28, 31, 36 and 39.6 percent levels -- by half a percentage point for the final six months of the year. The reductions will continue incrementally until 2006 when the brackets reach their ultimate lows of 25, 28, 33 and 35 percent.

That means beginning July 1, the IRS began collecting slightly less from you in payroll withholding.

Following is an example of how the rate cuts will reduce your taxes. For ease of calculation, exemptions or deductions aren't taken into account and the tax bills are computed for the full 2001 tax year.

• Joe, a single taxpayer, makes $40,000. Before July 1, $27,050 of Joe's income was taxed at 15 percent, meaning he will pay $4,057.50 in taxes on that portion.
• The rest of Joe's salary was taxed at 28 percent: $12,950 x 28 percent = $3,626. Joe's total tax bill for 2001 using the old tax rates would be $7,683.50.
• As of July 1, Joe's taxes changed slightly. The tax bill remained at 15 percent rate on the first $27,050 he makes (with the rebate check accounting for the 10-percent bracket). But as of July 1, his wages above that amount are taxed at 27.5 percent, making Joe's new total tax bill $7,618.75.

OK, it's only $64.75 less in taxes for Joe. Not a fortune, especially spread over several pay periods, but it's a start.

The actual amount withheld from each check will depend on your pay schedule (weekly, biweekly, semimonthly or monthly), your marital status, and how many allowances you claimed on the W-4 you filed with your employer. Some workers, unfortunately, won't see any extra money. Generally, taxpayers who earn more will see a bigger increase in their coming paychecks.

And for taxpayers who do get the withholding break, the small raise -- combined with the tax rebates -- means a nice bit of change for them, instead of the IRS, to pocket.

-- Updated July 20, 2001