Employers in U.S. Start Bracing for Higher Tax Withholding~ Be prepared

[HappyMama]

Here is the possible 2011 tax changes, once again knowledge is power. I know many of the villagers like being in the know, being prepared and if you have to make adjustments in your budgets or plans to accommodate.


Employers in U.S. Start Bracing for Higher Tax Withholding - Business Exchange


Bloomberg
Employers in U.S. Start Bracing for Higher Tax Withholding
October 27, 2010, 12:22 AM EDT

By Timothy R. Homan

(To see examples of changes in withholding taxes for different income levels, click here.)

Oct. 27 (Bloomberg) -- Employers in the U.S. are starting to warn their workers to prepare for slimmer paychecks if Congress fails to vote on an extension of Bush-era tax cuts.

“I’ve been doing payroll for probably close to 30 years now, and never have we seen something like this where it gets that down to the wire,” said Dennis Danilewicz, who manages payroll services for about 14,000 employees at New York University’s Langone Medical Center. “That’s what’s got a lot of people nervous. All we can do is start preparing communications with a couple of different scenarios.”

Lawmakers won’t start debating whether to extend the cuts, which expire Dec. 31, until after the Nov. 2 elections. Because it takes weeks to prepare withholding schedules, the Internal Revenue Service will probably have to assume the cuts will expire and direct employers to increase payroll deductions starting Jan. 1, experts say.

“We’re kind of stuck between a rock and a hard place,” said Ron Moser, head of human resources for the school district of Kenmore-Town of Tonawanda, New York, which pays about 1,900 teachers, custodians and aides each month. In upstate New York, where winter heating costs are among the highest in the country, many school employees earn between $20,000 and $40,000 a year, he said, and losing $50 in a paycheck is “a significant dollar amount.”

Employees Calls

“We’re starting to get the calls” from employees asking what they need to do for the next tax year, Moser said.

President Barack Obama and most Democrats want tax cuts extended for middle-income earners and to end for the wealthiest Americans, the top 2 or 3 percent of earners. Republicans want tax cuts extended for everyone, arguing that an increase makes little sense as the economy recovers from the worst recession since the 1930s. Tax cuts went into effect in 2001 and 2003.

For Moser, the challenge of the moment is keeping people in the Buffalo suburb, home to about 78,000 residents, calm about what will happen in January. The area has several manufacturing employers -- including 3M Co., General Motors Co. and Praxair Inc. -- and unemployment is 7.6 percent, lower than the national rate of 9.6 percent. Still, many people are worried, he said.

“The bulk of our employees don’t understand” the coming tax debate in Congress, Moser said. “When they see this type of thing happening they go into panic mode. They don’t follow what’s going on.”

June 2001 Rates

If Congress fails to act, income tax rates will revert to higher levels dating from June 2001.

For a married couple with an income of $80,000, that would drain an extra $221.48 in withholding from a semi-monthly paycheck, according to calculations by the Tax Institute at H&R Block. Married individuals earning $240,000 a year would lose an additional $557.78 to withholding in a single semi-monthly paycheck. The Tax Institute at H&R Block calculated federal tax rates for single-income earners and married taxpayers without children.

Paychecks could shrink in January and into February, depending on how long it takes Congress to act.

January could well be a time of “sticker shock” for salaried employees and their employers, said Kathy Pickering, executive director of the Tax Institute, an independent research division at Kansas City, Missouri-based H&R Block Inc.

“If the laws get passed late in December, it’s just necessarily going to take one to three weeks to get those payroll tables updated and implemented into the system,” Pickering said.

Blow to Spending

Allowing the tax cuts to expire, even temporarily, would deal a blow to disposable income and could curtail the consumer spending that accounts for about 70 percent of the economy, said Alec Phillips, a Washington-based economist at Goldman Sachs Group Inc.

“The longer the expiration lasts, the more significant the impact will be,” he said.

Economists raised estimates for consumer spending in the third quarter to 2 percent from 1.9 percent, according to the median forecast on a Bloomberg News survey this month. Spending rose at a 2.2 percent pace in the second quarter. The Commerce Department will release third-quarter data on Oct. 29.

Making a withholding-rate change could take longer for small businesses that don’t outsource payroll services, experts said. If a business can’t react fast enough, employees could recoup any over-withholding by filing a new W-4 tax form to temporarily lower their federal withholding rate.

Another option is to wait until 2012 when workers file their tax returns for the previous year.

Taxpayer Strategy

Taxpayers could use the same strategies if Congress reinstates the tax cuts next year and they need to recoup the extra withholding.

Jodi Parsons, manager of payroll and accounts payable at IFMC, a health care management company based in West Des Moines, Iowa, said if the IRS issues two sets of withholding tables, her two-person office could be overwhelmed with processing changes to W-4 forms.

“We’d have to basically go back and hand calculate checks for all 800-900 employees to determine whether or not we need to deduct additional taxes from them or refund taxes,” Parsons said. “We’d like to see changes in mid-November just to make sure we have time.”

There are now six federal tax brackets, ranging from 10 percent to 35 percent. If Congress doesn’t act, there will be five rates with the top bracket reaching 39.6 percent.

Nov. 20 notice

Last year, the IRS alerted payroll departments on Nov. 20 about the 2010 tax tables, said Scott Mezistrano, senior manager of government relations at the American Payroll Association in Washington. He said a delay in guidance from the IRS could increase costs for some small businesses.

The Treasury Department last week issued a statement that it was “maintaining flexibility” with regards to the release of the withholding tables for 2011.

If the IRS issues tables in mid-November and then again later, businesses will double their programming costs, Mezistrano said. A related concern, he said, is if Congress makes a last-minute decision to extend the cuts and companies aren’t able to implement the change before January.

Business owners may face “tons of angry employees pounding at my office door saying, ‘What have you done to my paycheck?’” Mezistrano said.

[HappyMama]

Here is another one:

2011 Tax Changes

The 2011 tax changes are coming and for most of us, expect to pay more. It is important to understand and note the income tax changes for 2011 as these changes can have a significant impact on what you receive in a refund or owe as a tax liability. Understanding how tax laws affect you can potentially save (or cost) you hundreds if not thousands of dollars. Many of the tax cuts that were enacted by President Bush in 2001 and 2003 are due to expire, resulting in significant changes in the next year. Here we look at the 2011 income tax changes that may affect your personal finances in a major way.

*
o
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Tax rates increase:

In 2011 top earners will see the end of reduced tax rates. For individuals in the top 2 tiers, the tax rate will return to the rates seen in 2000. This means today's tax rates of 33 and 35 percent will return to 36 and 39.6 percent for individuals and married couples that fall into the top earner category.

*
o
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Federal estate tax:

The federal estate tax (or the death tax) is currently zero as a result of a 2001 tax bill (and the failure of legislators to make changes in 2009). This will change back to previous tax rates in 2011. This means you can expect to see a top tax rate of 55-60 percent on estates valued at more than $1 million.

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Higher taxes on investment gains:

The maximum long term capital gain tax rate has been 15 percent, however that is going to change back to 20 percent in 2011. Dividend income will be taxed as ordinary income, possibly up to the rate of 39.6 percent.

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Earned Income Tax Credit:

Filers with three or more children who are in the highest income levels will see temporary increases repealed.

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Child Tax Credit:

In 2011, the child tax credit will return to $500 from the current $1,000. Taxpayers must earn more than $12,550 in order for the child tax credit to be refundable.

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Mortgage insurance premiums:

After December 31, 2010, the special itemized deduction allowable for mortgage insurance premiums will expire.

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Alternative minimum tax:

It is anticipated that in 2011, an automatic annual inflation adjustment will be applied to this exemption. Currently hitting the middle class more than the intended higher class, this change will account for inflation.

These are just a few of the changes we are likely to see in the year 2011. Knowing in advance what type of changes are on the horizon makes it possible for the individuals who will be most affected by these changes to prepare in advance. For those in the two highest tax brackets, many of these changes could have a major impact, therefore consulting with a tax professional as to how you can mitigate the damage may be a wise move. While there is not much we can do about these changes in the tax law, the opportunity to develop a strategy to deal with changes is available since we are aware of changes that will take place after the new year.

[MomToTwoBoys]

People mad about paying taxes? That's nothing new.

I imagine if people in the US had to pay as much in taxes as other countries, they'd just throw their hands up in the air and give up.

[HappyMama]

People mad about paying taxes? That's nothing new.

I imagine if people in the US had to pay as much in taxes as other countries, they'd just throw their hands up in the air and give up.

MTTB,

I have heard Canada taxes are real high, I think many of you here do such a great job budgeting with food etc costs.

My friend works in human resources and her company is worried as things are up in the air for what needs to be withdrawn from peoples taxes. The average will be 200.00 per pay period more for anyone over 85,000 until the issue is decided which won't be until after Jan. So it will be very hard for many people not expecting it. Not speaking for anyone not sure they will be mad as much as lost what to do if not expecting if, if you know what I mean. Hopefully if that is the case though everyone can prepare.

[Luckybustert]

Times are tough, people are hurting financially, so yeah....let's tax them more! BRILLIANT idea! (Sarcasm, another service I offer...lol)

I'm hoping for a last minute reprieve on more taxes but I won't hold my breath for it to happen in a timely manner. More likely it would be a retroactive change, creating that many more headaches for payroll departments everywhere.

[grneyegrl]

every one in the us forgets we have a war to pay for..where did bush think the money was coming from? that crap is going to take decades to pay off.. i mean really how we going to pay for that and the deficet(yes i still cant spell)..

[MomToTwoBoys]

MTTB,

I have heard Canada taxes are real high, I think many of you here do such a great job budgeting with food etc costs.

My friend works in human resources and her company is worried as things are up in the air for what needs to be withdrawn from peoples taxes. The average will be 200.00 per pay period more for anyone over 85,000 until the issue is decided which won't be until after Jan. So it will be very hard for many people not expecting it. Not speaking for anyone not sure they will be mad as much as lost what to do if not expecting if, if you know what I mean. Hopefully if that is the case though everyone can prepare.

The tax system here is something I haven't really delved into, other than to file DH's taxes. I know that there's a certain amount that you're taxed based on a low figure and then any amount after that until another figure, you're taxed more on it. The idea is that the more money you make, the more that you're taxed.

When I lived in the US, I didn't think I got taxed all that much and I was in the military too. I saw returns with one child totally at least $3k. I know that here since I've had both kids, I get a tax credit every month and then DH gets both a GST/HST credit and his tax return. However, he gets taxed at least 17% on an amount up to a certain figure and then from that figure onwards, it's another 22% on top of it.

I think a lot of people have to realize that infrastructure, war, education, health care, etc aren't going to pay for themselves. Quality of life is also coincidental with how much a government is willing to spend and where do they get that money?

Taxes

[getforfree]

Somebody's got to pay more taxes to pay for all those things. Most of these things affect higher income households, so I don't worry. I just hope that the tax credit for the kids won't decrease.

[HappyMama]

Somebody's got to pay more taxes to pay for all those things. Most of these things affect higher income households, so I don't worry. I just hope that the tax credit for the kids won't decrease.

Tax credit is suppose decrease from 1,000 per child to 500 per child unless voted otherwise.

[dcompton]

I don't like taxes - who does? - but I also don't like seeing cuts in essential services. I agree with the other posters - someone has to pay for them. I know that it will really hurt those who are struggling, and many are. But just in my own small work environment, I am seeing huge cuts projected for higher education in next year's budget, one hospital is closing, and two in small towns are going to be cutting back services because there just isn't the money to fund them any more. This hurts people too. And let's not even talk about the state of the roads and other infrastructure. I agree - someone has to pay for all these things. I wish it didn't have to be me, but I use some of these services and depend on government to do what individuals can't. Everything comes with a price tag.

[August29th]

I have appreciated the extra cash in my net pay since Obama took office and lowered my taxes.

I have not appreciated earning less money since the state began giving me 'furlough' days to try to save money since Bush and Arnold cut the school budgets so much. {sigh}

Who knows what's going to happen next ....

[HappyMama]

Here is some scenario numbers for people. I found this very interesting:

The Tax Foundation - Report Compares Typical Family Tax Bills for 2011 Under Three Scenarios

October 13, 2010
Report Compares Typical Family Tax Bills for 2011 Under Three Scenarios

Washington, DC, October 13, 2010 - The Tax Foundation has calculated what 11 typical tax returns will look like in 2011 under three scenarios:

* If Congress does not intervene to prevent the expiration of all the Bush and Obama tax laws that are set to expire this December 31;
* If the Congressional Republican plan is enacted, which with some modifications extends the Bush tax cuts but not the Obama tax credits; and
* If the Congressional Democratic plan is enacted, which with some modifications extends the Bush tax cuts and some Obama tax credits for those who earn less than $200,000 ($250,000 for couples).

"A total expiration of tax cuts enacted during the Bush and Obama years was considered highly unlikely a few months ago," said Tax Foundation Staff Economist Mark Robyn, who authored the new report, "but as year's end approaches, an unprecedented tax expiration that would raise taxes on almost every filer can't be ruled out."

The report only looks at tax bills in 2011, excluding tax increases enacted as part of health care reform which don't go into effect until later in the decade.

Tax Foundation Fiscal Fact, No. 251, "Family Tax Returns in Doubt As Expiration Approaches for Bush and Obama Tax Cuts: Three Likely Policy Scenarios," is part of a series answering frequently asked questions about tax expiration. Online, see the study, The Tax Foundation - Family Tax Returns in Doubt As Expiration Approaches for Bush and Obama Tax Cuts: Three Likely Policy Scenarios, and the FAQ, The Tax Foundation - Frequently Asked Questions on the Expiring Bush-Era Tax Cuts.

Four of the 11 typical families were families of four:

* A married couple (one earner) making $50,000 a year with two children would owe the federal government $690 in 2011 under either the Democratic plan or the Republican plan, but $2,833 under total expiration.
* A married couple with two children, but with both spouses working and together earning $85,000, would owe the federal government $5,385 in 2011 under either the Democratic plan or the Republican plan, but $7,235 under total expiration.
* A married couple with two children, both spouses working and together earning $150,000 ($135,000 in wages and $15,000 in long-term capital gains) would owe the federal government $17,800 in 2011 under either the Democratic plan or the Republican plan, but $21,602 under total expiration.
* A married couple with two children, with both spouses working and together earning $300,000 and claiming a $20,000 deduction for mortgage interest would owe the federal government $64,971 in 2011 under the Republican plan, $68,392 under the Democratic plan, and $76,616 under total expiration.

The Fiscal Fact also presents the effective tax rates (taxes as a percentage of income) for all 11 families and includes breakdowns of the typical deductions, exemptions and credits.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

[littleplum]

Thanks for linking to that calculator. It shows that for our family, the Obama Budget plan is by far the best for our family for TY2011.

[Vanilla]

Thanks for the links & the head ups.
I guess I need to re-work the family budget again.

[Persimmon Lace]

Ummm, there is no Obama budget bill, all of those things in the above articles will take place and there will be lots of people with children who are going to lose the child credit. His budget was to let the tax cuts lapse and do nothing else. In essence there is nothing being done on any front.