Backup withholding rate - Year-end update 

November 1: Congress adjourned for the November elections without extending a number of expired and expiring provisions—including the backup withholding tax rate that will change for payments made after December 31, 2012.

Background

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the backup withholding rate from 30% to 28% by accelerating the tax rate reductions that were enacted in 2001. The 2% rate reduction was the result of the backup withholding rate being linked, by statute, to the 4th lowest marginal rate under section 1(c) of the Code (for unmarried individuals). The withholding rate reductions were due to expire at the end of 2010, but were extended through 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Exploring the options

Congress adjourned for the November elections without extending a number of expired and expiring provisions—including tax rates for individual taxpayers.


Congress will reconvene after the November elections and is expected, among other things, to consider legislation to address the individual income tax rates that will apply after 2012. If Congress fails to act, all of the rates and brackets will return to pre-2001 levels. See TaxNewsFlash-United States: Individual tax rates - Year-end update

Statutory tax rate on ordinary taxable income (if no action is taken)

Rate 1 Rate 2 Rate 3 Rate 4 Rate 5 Rate 6
Present 10% 15% 25% 28% 33% 35%
2013 15% 15% 28% 31% 36% 39.6%

Backup withholding is linked to the 4th rate and, as shown in the table above, the rate would go from the current 28% to 31% for all payments made after December 31, 2012 if Congress fails to take any action.




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©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

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