Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, October 17, 2010

Get Ready for a Possible Cut in Pay

We wrote recently about avoiding large tax refunds (see our post titled “Are Your Tax Refunds Too Large” (October 6, 2010). Any planning you might try to do in that regard will be difficult due to Congress’ inability to finalize the tax rates for 2011.

According to an article in the Wall Street Journal titled “Delays to Tax Tables May Dent Paychecks” (October 7, 2010), workers may pay significantly more for withholding, starting with their first paycheck in January, if Congress doesn’t act quickly following the November 2nd election.

As most people know, Congress adjourned recently without addressing the issue and won’t return to Washington until November 15th. According to the Journal article, the Senate plans to address some non-tax issues first, when they re-convene. It’s possible they won’t be able to address the tax issues before they adjourn for the Thanksgiving recess. That would push the decision on the Bush tax cuts to early December.

Such a late decision on the taxes creates a real problem for the Treasury Department, which normally releases the tax-withholding tables for the upcoming year in mid November. Employers and payroll processing companies may find it difficult to change and test their systems prior to the first January paychecks being issued.

The Treasury Department has a couple of options. They can just tell employers to continue to use the current tables. In that case, taxpayers may end up being significantly under-withheld for the year. Another option is to provide a one or two-month grace period for the implementation of the new rates. A third option would be to assume Congress will extend the Bush tax cuts for those joint filers making less than $ 250,000 ($200,000 for single filers). However, they have never published tax tables based on assumptions before.

Whatever happens, we recommend you stay tuned to our blog for an update on how the issue is resolved and what you should do.


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