California’s New Tax Withholding Scheme.. Part II.

November 6, 2009

At the heels of RT’s last post “California’s New Tax Withholding Scheme,” I wanted to chime in about a couple of other things I had learned.  I had watched a piece on it on the local news, but found the highlights I took away nicely summarized in this article from the LA times.  I’ll just mention a couple things from the article, and leave the rest of it up to you to take a look.

As RT mentioned, the withholding is basically serving as an interest free loan to the state.  As the LA Times puts it,

“Think of it as a forced, interest-free loan: You’ll be repaid any extra withholding in April. Those who would receive a refund anyway will receive a larger one, and those who owe taxes will owe less.”

While it certainly provides relief to some of us to know that we will probably get the money back in April, for others the extra withholding may be dipping into an already tight holiday budget, or extra money they were hoping to earn some interest on.  My guess is that even though RT has pointed out that the difference is probably hardly noticeable on the paycheck, people will still panic since most of the U.S. population is already actively cutting back on spending.  Knowing the state is holding onto more money probably won’t do much to encourage consumers to spend more, which is what businesses typically depend on as we approach the holiday season.  For those that, for whatever reason, would like to see their paychecks unaffected, the LA Times also suggests a workaround.

“Savvy taxpayers can get around the state’s maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state’s Franchise Tax Board.

“People can get out of this,” she said, noting that most people would have to change their allowances through their employers. California’s budget leaders are banking on the hope that most won’t.”

Truth be told, I probably won’t take the time to file a new W-4 form at work but others may find this a good opportunity to hold onto more money per paycheck.  For those who tend to glaze over government related news (I’ll admit to being one of them sometimes.. trying to change that), hopefully this provided some good, easy to understand information for you!

-debs


California’s New Tax Withholding Scheme

November 1, 2009

The Governator

Effective right after Halloween, November 1st, the citizens of California will be subject to a higher income tax withholding. This will last, at least, until the end of the year. Assuming we all file our taxes correctly (ha!) this will effectively serve as an interest-free loan to the state for the rest of the year. I suppose this is the state government’s alternative to raising taxes, knowing full well that they stand to rake in some money here if/when people get confused about how to file their taxes and subsequently receive less money back. Is that too cynical?

California is raising the withholding rate by 10% on your paycheck. What does this mean for you? The truth is you’ll hardly notice it. But let’s give an example just for fun!

Let’s say you’re single (or dual income married, or married with multiple employers) with zero withholding allowances and your biweekly salary is $1000. That’s equivalent to $52,000 per year. From January 1, 2009 to October 31, 2009 your biweekly paycheck would reflect the state withholding $20.63. From November 1, 2009 through December 31, 2009 your biweekly paychecks will now show the state gouging you out of $22.69!

I guess that’s relatively harmless, right? I guess things could be worse, but let’s just hope that the tax returns we’re expecting don’t come back in the form of IOUs. More food for thought: after three months, you’re out one footlong sandwich from Subway. Think about that…

The government site has a moderately useful FAQ and general 2009 Rates and Withholding details for you to peruse including PDFs of the actual withholding rates.

I think it was a John F. Kennedy that once said: Ask not what your country can do for you, but what you can do for The Terminator.

-RT