Yes, that looks like a thatch layer.

Some thatch (about 1/2 inch) s beneficial to lawns, and seldom is a problem with a good healthy soil where the Soil Food Web digests the material that becomes thatch and converts it into plant food. Thatch is made of dead grass plants and roots and looks like dead grass and roots, not like soil. I see a thin layer of thatch but not enough to be concerned about.
How much organic matter is in that soil?

Are you sure it looks like a thin layer of thatch. That red line shows where the thatch is and when I measured it was 1" thick.

As far as organic matter I don't know. This use to be my grandparents house and the lawn is maybe 14 years old. Its never had topdressiing, the gardeners collected the clippings, and the watering was probably more then 2 times a week. I started watering once a week last year, and organic fertilizer last year. I just started mulch mowing mid-summer this year. I did see two worms in that part that I cut out. Over all the grass is pretty healthy the roots go maybe 5" down. There are two areas that are kind of brown but that is because not enough water in those areas and a little compaction.

I want to topdress and overseed but not if the seeds are going to root on to the thatch and not the soil below the thatch.

This post was edited by NickRose on Sun, Oct 12, 14 at 14:26

Thatch will be a light brown in color and look like the material it was made of and I see some of that just below the grass in your picture. What you have labeled as "thatch" does not look to me like thatch, but as partially digested organic matter.

Thank you for the help.

Here is a short little article that concerns the thatch you are talking about:
http://urbanext.illinois.edu/lawntalk/weeds/managing_thatch_in_home_lawns.cfm

It sounds to me that you are on the right path for reducing the thatch layer and that you should see improvements by next year.
The common cause is fertilizers constantly being applied that cause roots to grow at the surface and the constant watering that helps it do so.

The lawncare habits you are describing now are best and as long as the grass remains healthy, no need for drastic measures. :)