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Financial Planning > Tax Planning

Obama Signs 3% Withholding Tax Repeal Into Law

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President Barack Obama signed on Monday a bipartisan bill that repeals the 3% Withholding Tax mandate enacted in the Tax Increase Prevention and Reconciliation Act of 2005.

If it had not been signed into law, on Jan. 1, 2013, the 3% Withholding Tax would have had a negative impact on advisors and their clients that do business with local, state or federal governmental entities.

The Senate passed the bill, 95-0, on Nov. 11, while the full House approved it, 495-16, on Oct 27.

For a broker-dealer or advisor, the 3% withholding tax could have directly affected an advisor that, for instance, “helps run the local government’s 401(k) plan,” said Chris Paulitz, spokesman for the Financial Services Institute. For clients, if they are “cutting lawns for government buildings, they lose that 3% of their pay throughout the year—money they could [give to] an advisor to invest for them, or to create more jobs in their business.”

Dale Brown, president and CEO of the Financial Services Institute, said in a statement that “businesses that provide services to the government deserve to be paid in full and due upon receipt. They shouldn’t be forced to lose a percentage of their pay they could be investing throughout the year or using to hire additional employees. The withholding tax would have created cash flow problems as well as drained capital that could have been used for job creation and business expansion.”


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