Don't be fooled by January pay, higher taxes loom

WASHINGTON (AP) — Workers probably won't feel the full brunt of next year's tax increases in their January paychecks, but

don't be fooled by the temporary reprieve.

No matter what Congress does to address the year-end fiscal cliff, it's already too late for employers to accurately withhold

income taxes from January paychecks, unless all the current tax rates remain unchanged, which is an unlikely scenario.

Social Security payroll taxes

are set to increase on Jan. 1, so workers should immediately feel the

squeeze of a 2 percent

cut in their take-home pay. But as talks drag on over how to

address other year-end tax increases, the Internal Revenue Service

has delayed releasing income tax withholding tables for 2013.

As a result, 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.

If employers don't withhold

enough taxes in January, they will have to withhold even more taxes

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


The tax increases could be steep. If Congress fails to act, workers at every income level face significant tax increases next

year as part of the year-end "fiscal cliff."

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 every two weeks, that's about $92 a paycheck, on average.

Someone making between $75,000 and $100,000 would get a tax increase averaging nearly $3,700. If the worker is paid every

two weeks, that's about $142 a paycheck.

O'Toole said it would take most employers two weeks to four weeks to update their payroll systems, once new tax withholding

tables are released. For some small businesses, it could take longer.

"Employers can't really just come up with withholding tables on their own, depending on what the rates are," O'Toole said.

"The smaller companies that do not use a payroll processing service probably would have more problems than anyone else."

On Friday, the IRS said it plans to issue guidance by the end the year, though it won't be early enough to affect paychecks

in early January.

"We are aware that employers

have questions with respect to 2013 withholding," the agency said in a

written statement. "Since

Congress is still considering changes to the tax law, we continue

to closely monitor the situation. We intend to issue guidance

by the end of the year on appropriate withholding for 2013."

About three-quarters of

taxpayers got tax refunds this year, averaging $2,707, according to the

IRS. That gives most taxpayers

some leeway to manage their income tax withholding. However, many

people rely on tax refunds to pay bills or make major purchases.

"The reality is, the vast majority of Americans do live paycheck to paycheck and that tax refund is their most significant

payday of the year," said Bob Meighan, vice president of TurboTax, an online tax preparation service.

Most of the expiring tax breaks

were first enacted under President George W. Bush and extended under

President Barack Obama.

Obama campaigned for re-election on extending the tax cuts on

incomes below $200,000 for individuals and $250,000 for married

couples. Obama would let the tax cuts expire on incomes above

those amounts.

In negotiations with House

Speaker John Boehner, Obama offered to raise the income threshold,

limiting tax increases to those

making more than $400,000. Boehner, who has argued for years that

the tax cuts should be made permanent for everyone, responded

by trying to push a bill through the House that would have let

many of the tax cuts expire on incomes above $1 million.

Many Republicans revolted and Boehner, R-Ohio, shelved the bill, sending lawmakers home for the Christmas holiday and leaving

the outcome of talks in doubt as the new year approaches.

If Congress and the White House

cannot reach a deal, income tax rates would go up, estate taxes and

investment taxes would

increase and the alternative minimum tax would hit millions of

middle-income people. A temporary payroll tax cut that has

benefited nearly every wage earner in 2011 and 2012 expires,

costing the average family an additional $1,000 a year by itself.

In addition, dozens of other

tax breaks for businesses and individuals that are routinely renewed

each year already expired

at the end of 2011. Congress was expected to renew many of them by

January, so taxpayers could still claim them on their 2012

tax returns.

If Congress doesn't act on

those tax cuts, businesses would lose a popular tax credit for research

and development as well

as generous tax breaks for investing in new plants and equipment.

Individuals would lose federal tax breaks for paying local

sales taxes, buying energy efficient appliances and using mass


In all, taxes would go up by about $536 billion next year.

Tax Increase Breakdown

A big package of tax cuts first enacted a decade ago are set to expire at the end the year, unless Congress and the White

House reach a deal to extend them. How the looming tax increases would affect households at different income levels.

• Annual income: $20,000 to $30,000. Average tax increase: $1,064.

• Annual income: $30,000 to $40,000. Average tax increase: $1,417.

• Annual income: $40,000 to $50,000. Average tax increase: $1,729.

• Annual income: $50,000 to $75,000. Average tax increase: $2,399.

• Annual income: $75,000 to $100,000. Average tax increase: $3,688.

• Annual income: $100,000 to $200,000. Average tax increase: $6,662.

• Annual income: $200,000 to $500,000. Average tax increase: $14,643.

• Annual income: $500,000 to $1 million. Average tax increase: $38,969.

• Annual income: More than $1 million. Average tax increase: $254,637.