As Congress and the rest of America head into a two-year confrontation over taxes, the Federal government made a clear-cut decision on revenue policy last week, repealing the 3% withholding tax. And the repeal might actually make life easier for financial planners and their clients.

The tax was a preemptive measure, adopted in 2005, to ensure that government contractors paid appropriate income taxes on work completed for the government. It would have affected business owners into 2013 had it not been repealed.

The federal government was authorized to withhold 3% of any federal payments to contractors exceeding $10,000, just in case the companies slipped on this duty. Once the government was satisfied that the contractor had met its obligation, it would refund the excess.  

That maneuver all but ensured that doctors, construction company owners, IT professionals and other small business owners lost out on capital to reinvest in their firms, said Chris Paulitz, a spokesman for the Financial Services Institute. Financial advisors felt the pinch if they provided guidance on qualified retirement savings accounts for government entities, and, indirectly, as their clients had fewer dollars to for them to manage. In principal and practice it was not a good law, Paulitz said. 

“Businesses … shouldn’t be forced to lose a percentage of their pay they could be investing throughout the year or using to hire additional employees,” Dale Brown, president of the FSI, said in a statement. “The withholding tax would have created cash flow problems as well as drained capital that could have been used for job creation and business expansion.”

On Nov. 21, it went away. But there are still a lot of decisions in limbo. The federal government has yet to address the 10 or so tax credits and deductions that are set to expire in 2011, including the alternative minimum tax patch, for example. There is also the handful of tax rollbacks that expire by the end of 2012, including the 15% capital gains top rate, and the tax increases that will roll in during 2013.





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