Thursday, September 23, 2010

Even With Extended Tax Cuts, You Might See Smaller Paychecks

All the tax hub-bub these days is all about the Bush tax cuts and whether Congress will extend, all, some or none of them. But as my fellow tax blogger Kay Bell of Don’t Mess with Taxes points out, if Congress doesn’t decide quickly, we could all be seeing smaller paychecks next year, even if all the tax cuts are extended.

Why? It all revolves around tax tables. Every year, the IRS creates tax withholding tables. This is what your payroll department uses to determine how much money to withhold from your paychecks. It takes the IRS considerable time to update these tables. According to the IRS, the beginning of November is their deadline for distributing the tax withholding tables to employers. So, if the House and Senate haven’t made up their minds by then, the tables will have to be distributed with the pre-2001 tax rates. And that means more money taken out of your paycheck come January 1.

Whenever Congress makes a final decision, the IRS will start the process to update the tax withholding tables, meaning you will eventually get the benefits of any extended cuts. But it will take time, so for a while you may be seeing a much smaller paycheck than you were expecting – and right after the holidays that could really hurt.

Read more from Don’t Mess With Taxes here.

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