Unless the lame-duck Congress acts to extend the Bush-era tax cuts about to expire at the end of 2010, the income tax rates that will take effect Jan. 1, 2011 will return to the rates that were in effect a decade ago. The result: More money will be withheld from paychecks, according to an analyst at the tax publisher CCH.

“Ten years ago, we were facing the same situation: There was talk of upcoming tax cuts,” says John W. Strzelecki, CCH senior payroll analyst. The tax cuts – now known as the “Bush tax cuts” – were signed on June 7, 2001. The IRS subsequently issued new withholding tables, effective July 1, 2001, that incorporated the new tax cuts.

In addition, according to Strzelecki, the new tables took into account the fact that too much money was taken from paychecks that were issued in the first half of the year. “However, at the end of 2000, the IRS did not delay releasing new withholding tables for 2001, even though if a tax cut did come it meant too much money was being withheld from paychecks that were issued prior to the tax cuts. Rather, the IRS issued new tables based on the tax rates that were in effect on Jan. 1, 2001, and also incorporated the 2001 personal exemption amount into the tables.”

Fast forward to today. The Bush tax cuts are nearing expiration at the end of the year. Under federal law, the tax rates that will be in effect Jan. 1, 2011, will be the rates that were in effect on Jan. 1, 2001.

Strzelecki says the IRS will likely issue new withholding tables sometime this month effective Jan. 1, 2011, based on the 2001 tax rates that are scheduled to go into effect at the start of the year. In addition, the IRS will incorporate the 2011 personal exemption amount —projected to be $3,700 — as they did in the 2001 tables.

What happens if the Bush tax cuts are extended? According to Strzelecki, the IRS will revise the withholding tables with an effective date that allows just enough time for the payroll industry to implement the changes, as they did in June 2001. The tables will take into account the fact that too much money was withheld from the paychecks that were issued prior to the tax cuts, as in 2001.

“What it all boils down to is workers will see less take home pay beginning in 2011 and more take home pay later in the year, just as we saw in 2001,” says Strzelecki.

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