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Fiscal Cliff: What It Means For My 2013 Paycheck?

The financial deadline looms in Washington, with no deal yet made. Check this primer, and share your questions and thoughts.

With Christmas 2012 over, one reality check is that the looming "fiscal cliff" deadline is just a few days away.

On Dec. 31, tax cuts dating to the George W. Bush presidential term are scheduled to expire, and President Obama and congressional leaders have not reached a compromise.

Of course, that means tax bills would increase for many middle- and upper-class taxpayers. And that means paycheck withholding for many workers would change, leaving them with less take-home pay in the new year.

Apparently, though, there will be no immediate change in withholding tables, while the situation is unresolved.

According to John Tuzynski, the IRS’ chief of employment tax policy, employers should continue to use 2012 withholding tables and personal exemption amounts until further notice.

And cnbc.com reported that employers are planning to withhold income taxes at the 2012 rates, at least for the first one or two paychecks of the year, said Michael O'Toole of the American Payroll Association.

However, a caveat: If employers don't withhold enough taxes in January, they will have to withhold more later in the year to make up the difference. Otherwise, taxpayers could get hit with big tax bills, and possibly penalties, when they file their 2013 returns.

If no compromise is reached by the president and Congress, the hit will be noticeable in many workers' paychecks.

A taxpayer making between $50,000 and $75,000 would get an average tax increase of $2,400, according to the Tax Policy Center, a Washington research group. If the worker is paid biweekly, that's about $92 a paycheck.

About 75 percent of taxpayers got tax refunds in 2012, averaging $2,707, according to the IRS. And many people rely on tax refunds to pay bills or make major purchases.

 

Ed ward H. Wiznitzer December 29, 2012 at 03:45 PM
While this article is correct as far as it goes, it omits that wage earners should expect an immediate 2% cut in take-home pay as soon as their first paycheck arrives in 2013. In addition to the current income tax rates expiring at midnight of the New Year, so does the current reduced Social Security tax of 4.2%. It reverts to the previous level of 6.2%. Most employers and payroll services will begin to withhold at this higher rate immediately, because the prevailing sentiment in Washington is to let this provision expire. While most payroll issuers will continue to withhold the income tax at 2012 tax rates until further notice, changing to new rates or adjusting retroactively will take longer than your article implies. Once new tax rates are enacted, payroll issuers must still wait for the IRS to issue and publish regulations before they can start withholding at any new rates. In the past, this process takes one to two months. Taxpayers need to beware of this and any other changes new legislation may bring that effect their individual tax circumstances. Failure to plan for these changes may lead many to get burned when the time comes for filing their 2013 income tax returns. Edward H. Wiznitzer, EA, MBA H & W EDWARDS Income Tax

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