The Federal tax debt many people will not be able to avoid…

Everyone likes a tax cut – but what if it isn’t a real one? If you are a Federal government employee there’s a likely tax debt that you will have to deal with whether you like it or not – the Payroll Tax Deferral Executive Order. Here we will look at exactly what it is and why you should not spend the ‘extra’ cash you get in your paycheck. 

A tax cut that isn’t a tax cut

The Payroll Tax Deferral Executive Order is a tax cut given by the President that you will have to pay in May anyway. Essentially you will not now have to pay the 6.2 per cent of the Social Security portion of your tax if you earn less than $104,000 annually.

The problem is this is not a tax cut. Only Congress can give you a tax cut. Neither the Republican-run Senate or Democrat-run House agreed to the idea so the Executive Order couldn’t become a proper tax cut. 

The IRS will still want your money – the 6.2% of your income in your pocket until then – anyway. That could well mean that though you are getting 6.2 per cent in your pocket now you may be paying 12.4% in Social Security for eight more months – until 2022. 

Private employers for the most part have seen the difficulty of their employees getting into tax debt – and the difficulty of cutting a tax payment then somehow clawing it back from their staff next May. As such for the most part only Federal government employees including postal workers, Justice Department employees and other workers (yes, including IRS agents!) will be impacted by this tax-cut-that-isn’t-a-tax-cut. 

It isn’t a huge ‘tax cut’ either. If you’re towards the higher end of the scale on $8,000 a month this amounts to $496 in your pocket. It won’t cover your rent for a week!

What can you do if you’re affected?

On a $5,000 a month income you’ll have an extra $310. Save it. If you’ve the time then put it in a special savings account, though you won’t even be able to put it in one of those high interest accounts that mature in a year, because you’ll need it back in eight months!

The alternative is to somehow enjoy having an extra few hundred dollars in your account every month that may pay for a few nicer groceries or a visit to the mall with your kids, knowing the pain will come in the summer holidays next year when you’d probably like that ‘extra’ cash you’d have anyway but for this tax holiday. 

The alternative? You could almost imagine the authors of this ‘tax cut’ thinking that people will excitedly spend their extra few cents in the dollar of cash, thanking the President that next summer they’ll be in debt to the IRS!

What if you’re in debt to the IRS already?

The fact is, millions of Americans have debt with the IRS already. Here at Defense Tax Partners we know that as we’re growing our business. Perhaps in such a situation you may feel you have nothing to lose and spend the extra 6 cents in the dollar you get from your employer!

The IRS has a mounting battle with scant resources to tackle late- and non-payers. If you owe a few hundred bucks to the Treasury then it makes sense to call them and settle up with a little short term pain avoiding the automatic penalty interest and charges that can soon increase the tax debt out of control. 

If you have had shocks where you have either been stupid with your money (as perhaps the authors of the Executive Order here want you to be) or had to spend money set aside for the tax due to a family emergency or unemployment, and have accrued a large tax debt then it may be worth giving us at Defense Tax Partners a call to discuss your problems. Through negotiating with the IRS on your behalf we can significantly reduce your overall burden, or at the very least arrange a repayment plan that you can afford without too much pressure on your finances.