Tax-Rate Uncertainty May Cost Employees

Unless Congress and Treasury act, and fast, withholding may go up

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With Congress in recess until after the election, employers may be getting concerned about how to figure payroll taxes for 2011, according to The Wall Street Journal.

The Treasury, understandably, usually waits for congressional action before it publishes changes to tax tables. But this year, if Bush-era tax cuts are allowed to expire, personal tax rates would rise, so uncertainty about what will happen is keeping everyone guessing, the article says.

President Barack Obama has proposed to keep current tax rates in place for couples earning up to $250,000 ($200,000 for individual earners), but Congress must act on this proposal before it can become law. See “Gauging the Impact of Obama’s Proposed Tax Plan: Part II.” 

The Journalarticle explains that companies need time to adjust their payroll tax software and if the Treasury waits too long to announce 2011 rates, it will be difficult to get those adjustments in place before the beginning of 2011.

An expert opinion

"It would make sense from a practical standpoint, that unless 2010 tax reform and revised rates are enacted in 2010, Treasury will have to observe current tax rates (tax table rates) until December 31, 2010, and the new rates effective January 1, 2011 and until legislative action occurs to change the automatically effective 2011 rates. More important however, is if and when tax rate revisions will occur in 2010 for 2011. As Congress is on recess until after the midterm elections, and with the uncertainty of Democratic or Republican control, there is no certainty at all that there will be 2011 tax reform of any kind in 2010," Tim Speiss, partner and chairman of EisnerAmper Personal Wealth Advisors, told AdvisorOne.com/Wealth in an email.

"That said, on October 6 Senate Finance Committee member Sen. Ron Wyden (D-Ore) was quoted as suggesting that despite an expected Congressional shake-up from the midterm elections, 2011 could be the "best chance" yet for Congress to enact a tax reform bill," Speiss added. "Under this scenario, income tax rate reforms would occur in 2011 and we would arrive at January 1 with the income tax rate structure that existed in 2001 and a top individual income tax rate of 39.6%. However, should the Democrats

retain control of the Congress after the midterm elections, there is possibility that the President's proposal of a top individual rate of 35% on income over $250,000 could prevail. My sense is 2010 tax legislation is looking more unlikely, and that thoughtful legislation in 2011 is more likely."

Speiss continued: "If the tax cuts are allowed to expire at year end, higher rates automatically kick in unless the Treasury publishes 2011 tax tables based on what is expected to happen when lawmakers get around to tackling this issue.

The Journal notes that “Treasury officials might consider a one- or two-month grace period in which it maintains current tables until Congress passes tax legislation.”

Congress never did act on the estate-tax last year, and it expired at the end of 2009, resulting in no estate tax for 2010 and throwing estate and tax planning into turmoil. And the estate tax roars back in 2011 at higher rates than the 2009 rates, unless Congress acts on that before year end.

Read the stories “Estate Tax Uncertainty Continues" and “Lawmakers Unable to Pass Estate Tax Reforms” on AdvisorOne.com.

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