Time to Celebrate (?) 60th Anniversary of Tax Withholding

This month marks the 60th anniversary of United States federal income tax withholding. While you may be dubious as to whether or not this is an event to celebrate, you may at least be interested in a bit of historical perspective about something all employees accept without question. It wasn't always that way.

Prior to 1943, tax payments were made by only the wealthiest taxpayers who wrote a single check and mailed it with their tax return in time for the annual due date of March 15. In 1942, our nation was under attack, and Washington needed money to fund the country's involvement in World War II. A decision was made to increase the amount of income tax and also the number of people who would be affected by it. The result was that taxes were doubled and 34 million citizens were added to the tax rolls.

As the March 1943 due date approached, it became clear that many taxpayers weren't saving to pay their taxes. The government launched a brilliant collection plan and called it the Current Tax Payment Act, or "Pay As You Go." Instead of taxpayers having to write checks, the government would simply take the money away from taxpayers before they ever got their hands on it. Employers were ordered to start withholding in July 1943. Withholding was a flat 20% of gross income.

To ease the burden of new and higher taxes for so many unprepared citizens, the government offered a partial amnesty program when the new withholding program was launched, telling taxpayers that for one time only, they could reduce their taxes by 75% of the lower of their income tax on 1942 or 1943 income.

The withholding system remains basically intact today, however today's taxpayers have a bit more control over how much or how little is withheld. While tax rates have escalated, taxpayers can claim exemptions from withholding based on the number of dependents they support and the amount of tax deductions and credits they expect to report on their tax return. Or if they prefer, they can have extra tax dollars withheld from their pay. And of course there is an extra month now for filing income tax returns. The March 15 due date was changed to April 15th in 1954. No doubt that was a year for a certain amount of tax-based celebration as well.


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