New tax withholding scheme won't put much more money in your pocket

February 02, 1992|By Gene Yasuda | Gene Yasuda,Orlando Sentinel

The tax withholding plan President Bush unveiled in his State of the Union address will increase workers' paychecks automatically starting in March, but financial planners say consumers shouldn't expect it to greatly bolster their spending power.

"What this really means is that instead of buying a hamburger, you can go out and get a full dinner," said Beverly Paulk, a partner and certified financial planner at Aegis Financial Advisors Inc. in Maitland, Fla.

For example, a married worker earning up to $78,700 a year can expect to see a weekly increase of $7 in his paycheck.

Mr. Bush's plan might have little effect on individual consumers, but administration officials say it should boost the nation's take-home pay by $2 billion a month.

Analysts say the plan provides advantages for the president and the consumer: Mr. Bush can implement it without congressional approval, enabling him to provide a much-needed cash infusion quickly for the ailing economy, and cash-short tax payers can get fatter paychecks without doing any paperwork.

But financial planners caution consumers that Mr. Bush's plan is not a tax cut. It simply allows taxpayers to receive bigger paychecks now. In exchange, they'll receive smaller tax refunds in 1993. Married workers, for example, will see their refund decrease by an average of $350.

Here's how it works:

When taxpayers complete their W4 forms, they mark the exemptions they are claiming. Based on the number of exemptions, payroll departments use a federal tax withholding table that shows how much money should be withheld for each exemption.

Under Mr. Bush's plan, employers will refer to a new table that lowers the amount withheld for each exemption. The changes are unlikely to affect high-income wage earners.

More than 90 million taxpayers withhold more than they need to, according to the Internal Revenue Service.

Those who withhold less than they should, however, might have to write a check to the government when they file their tax returns.

If a taxpayer wants to withhold more than the new tables will allow, financial planners say, he must reduce the number of exemptions being claimed.

Taxpayers shouldn't allow the government to withhold more money than necessary, they say.

"When you over-withhold, you are giving the government an interest-free loan," Ms. Paulk said. "Then, you've missed an opportunity to earn interest on that income. We don't think that's right because you've worked too hard for your money."

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