Just last week you may have felt the presence of Arnold and the State legislature rummaging around in your wallet. Effective Nov 1 withholding rates and estimated tax payment requirements increased by 10%. This is not a tax increase they tell us, only a temporary loan from us to them for tax monies that the state will ultimately have to refund to you.

Hopefully they will actually refund the excess taxes they are taking, instead of issuing a warrant that the banks will not honor, or simply parking on your refund for an extra month or so, both of which FTB has done recently. Better still, you will be earning a whopping 0% (that’s zero) rate of interest on your “loan” to the state. So, not only are you now a lender, but you aren’t making any money at it either. Does this qualify all of us as failing banks? Perhaps Federal bailout money will soon follow…

Here’s what you need to do to limit the damage. First, be sure you pay in JUST ENOUGH tax to be penalty proof under the rules, regardless of what you may owe in April. This 10% increase is actually voluntary, and you can adjust your withholding to have the correct amount taken out of your paycheck. Second, after you have penalty proofed yourself, STOP. Arrange your taxes so that you owe the state in April, not the other way around. This will limit your exposure to getting a warrant or waiting for a delayed refund to arrive. Note that this new increased withholding level is set to continue indefinitely.

This strategy may have Federal tax consequences, so before embarking on it you should contact us or do the math to see if it works for you.

Sidebar: The LA Times reports that the very same elected officials that brought us to this point because of their inability to balance the budget or live within their means are currently trying to exempt themselves from pay cuts that they implemented for all state employees. I’d be OK with that if we had the ability to reduce their pay to zero under a pay-for-performance plan.