Will You Pay Higher Taxes in 2011?

In Tax Planning by Daniel Friedel

Lack of congressional action on 2011 income taxes may force the Treasury Department to make unprecedented moves to prevent U.S. workers from seeing large tax increases in their January paychecks.

The issue: 2011 tax-withholding tables. Treasury officials usually release the tables, which determine the take-home pay of millions of wage-earners, by mid-November because it takes payroll processors weeks to adjust their systems before Jan. 1.

But congressional leaders recently postponed voting on taxes until after the election and lawmakers don’t reconvene until Nov. 15. The Senate is scheduled to take up several nontax issues when it returns and is expected to leave for Thanksgiving soon after, possibly pushing a vote on taxes into December.

Wall Street Journal, Delays to Tax Tables May Dent Paychecks, by Laura Saunders:

“Things get very dicey after the first of December” because of employers’ need to know the 2011 rates, said Michael Graetz of Columbia University Law School, a former Treasury official. …

Some Capitol Hill tax staffers have suggested that the Treasury could set 2011 withholding at current levels for joint filers earning less than $250,000 ($200,000 for single filers), on the assumption that Congress seems likely to enact this change. Others have suggested that if Congress doesn’t act in time, Treasury officials might consider a one- or two-month grace period in which it maintains current tables until Congress passes tax legislation.

Treasury officials declined to discuss what they will do if lawmakers don’t come to a quick decision. … Treasury officials’ most obvious option is the least attractive. If they publish tables based on expiration of the Bush tax cuts, which occurs Jan. 1, millions of low- and middle-income taxpayers who have paid little or no income taxes for a decade would likely see increases in January. Prof. Graetz estimates that higher withholding could take up to $10 billion a month out workers’ pockets due to higher tax rates alone.