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Fiscal standoff leaves U.S. payrolls in doubt

As the White House and Congress try to avoid the tax increases and spending cuts coming next week, taxpayers, businesses and even the IRS are scrambling to figure out the effects if an agreement is not reached.

December 28, 2012|By Jim Puzzanghera and Marc Lifsher, Los Angeles Times

WASHINGTON — If the nation goes over the "fiscal cliff," some Americans will wake up Tuesday with financial headaches to rival a New Year's Eve hangover.

More than 2 million long-term jobless would receive their final unemployment benefit check within days. Millions of taxpayers would be unable to file their returns early, resulting in delayed refunds. Taxes would rise immediately on workers across the board. And although some of those increases may eventually be reversed, the first paychecks of the year would be smaller until any legislative fixes kick in.

Even if the crisis is resolved quickly after the new year as pressure mounts on President Obama and lawmakers, it poses a short-term administrative nightmare for businesses. And it would be a financial blow to millions of people struggling to make ends meet in the aftermath of the Great Recession.

"As a working-class person, I would miss any money taken out of my paycheck," said Stephanie Smith, an office administrator in Sacramento. "I just feel that we're already paying high taxes, and it feels like we're still in a recession. Everybody wants to take money out of our paychecks, but nobody wants to put more in."

Quiz: How much do you know about the "fiscal cliff?"

As the White House and Congress try to avoid the large tax increases and federal spending cuts coming next week, taxpayers, businesses and even the Internal Revenue Service are scrambling to figure out the effects if an agreement is not reached.

The fiscal pain could be averted by a last-minute deal. And even if there is none by Tuesday, Washington policymakers could retroactively reduce tax rates if they ultimately make a deal. But the uncertainty and short-term loss of income could damage an already fragile economy.

Some effects:

Income taxes: Rates would rise on everyone as the George W. Bush-era tax cuts expire. Middle-income households would get hit hard, paying about $1,500 more a year in taxes.

Payroll taxes: Rates would increase by 2 percentage points with the lapse of a temporary, two-year tax cut designed to boost the economy. Workers making $50,000 annually would take home about $40 less every two weeks.

Long-term unemployment benefits: Checks would abruptly end for people receiving extra federal aid — as much as 47 additional weeks of benefits in states such as California. State benefits of up to 26 weeks would still be available, but workers would be out of luck once those run out.

Alternative minimum tax: The number of people facing the provision would skyrocket to about 33 million next year from 4 million this year. The tax, enacted in 1969, was designed to make sure the very wealthy paid some income tax. But it was not indexed to inflation and needs to be fixed each year to avoid ensnaring middle-income households.

Although Congress at some point is expected to spare most of those people from that tax, delays in doing so mean that as many as 100 million people might not be able to file their returns until the end of March or later, according to the IRS. Delays would come as the IRS has to reprogram its system, as well as for taxpayers who would have to do special calculations to determine whether they owe money because of the tax.

Business already are struggling to adjust. They've got to figure out how much in federal taxes to withhold from employee paychecks starting next week. But as of Thursday, the IRS still had not told employers what the 2013 withholding levels would be.

That limbo is particularly vexing for small firms as Golden State Magnetic & Penetrant. The Los Angeles company inspects, cleans and paints aircraft and aerospace components. The firm's president, Joanne Weinoe, does the payroll for herself and her 12 employees. At present, she doesn't know what the withholding should be for the next set of checks she cuts.

"I'm going to tear my hair out of my head and shoot myself," Weinoe joked, adding she'll wait until the morning of Jan. 4, her next payday, before she makes any changes.

"If I have to adjust them, it'll be additional work for me," she said. "Every time they change something, it becomes more work for employers."

The IRS said it continued "to closely monitor the situation" and would "issue guidance by the end of the year."

Workers might not see the new income tax rates immediately reflected in their paychecks. The American Payroll Assn. is advising its members to continue to use 2012 withholding tables until they hear differently from the IRS.

The payroll service Payality Inc., with headquarters in Fresno County, is urging its 700 clients with 25,000 employees throughout the state to hold off on issuing paychecks and making direct deposits for January as long as they can in hopes that lawmakers and the Obama administration will strike a deal.

"We should have some direction by Dec. 31," company President Chet Reilly said. "Then we'll have to scramble as fast as we can."

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