It will look like a tax, and feel like a tax and quack like a tax, but it's not a tax. That is, unless you've been cheating the government by not paying it.
I'm talking about the new 10 percent withholding on interest and dividend payments. Starting July 1, 1983, taxes must be withheld from these payments, just as they're now withheld from your paychecks. Only low-income people and most of the elderly will be exempt.
Behind this change in tax procedure lies a growing incidence of tax cheating. In a 1981 study, the Internal Revenue Service estimated that only 89 percent of interest income was being reported to the government and only 85 percent of dividends. The Treasury lost at least $7.7 billion on those two items alone.
By contrast, 99 percent of wages were reported, chiefly due to the compelling presence of tax withholding.
The tax publisher, Prentice-Hall, foresees three misunderstandings arising from the new system:
1. You might think that you're paying a new tax. You're not. You are simply prepaying a tax that you probably owe. If it turns out that you owe no tax, you can file for a refund.
2. You might think that your bank or corporation is suddenly paying you less. When you've been getting a $200 dividend check, and suddenly the amount drops to $180, the company seems to have cut the dividend. In fact, it's paying what it always did. The company simply deducted $20 for taxes and sent it on to the federal government.
3. You might think that you're obliged to withhold taxes, if you borrowed money from another person and are paying interest on the loan. You're not. In most cases, only companies and financial institutions are charged with tax withholding.
As a general rule, the tax will be withheld at the time when the interest or dividend is paid to you or credited to your account. So there's no change in the timing of your payments, only in the net amount that you receive.
To simplify their lives, banking institutions will be allowed to defer tax withholding until the last day of the year on checking and savings accounts. But they have to keep enough money on the account to meet your 10 percent tax obligation. If you try to close the account, the institution must retain 10 percent of the interest paid, to send to Uncle Sam. If you write a check for the total sum in the account the check might bounce, because part of the balance might be pledged to the government.
No tax need be withheld, however, on interest or dividend payments that will equal no more than $150 for the year as a whole.
Tax withholding will reduce the amount of money building up in your savings account, although in most cases the loss will probably be small. Say, for example, that you're due a $200 interest payment, that you plan to leave it in the bank to compound. When the bank starts withholding 10 percent for taxes, only $180 will remain for interest compounding. So there's less to build on.
Not everyone has to undergo tax withholding.
* You can be excluded if you owed less than $600 in federal taxes in the previous year (or $1,000, if you filed a joint return).
* You can be excluded if you're 65 or over and owed no more than $1,500 in tax the previous year ($2,500 on a joint return). Only one member of a married couple has to meet the age requirement in order to avoid withholding. The Treasury estimates that this loophole exempts 86.7 percent of the people over 65.
But -- and this is extremely important -- these exemptions are not automatic. You have to file for the right to be excused from tax withholding. The procedure for getting an exemption has not yet been determined. You might have to request an exemption form yourself. Or every bank and S&L, insurance company, brokerage house, mutual fund and other payer might have to send you an exemption certificate before the 1983 deadline for you to fill out if you think you qualify.
It's important that you not throw out any mail from these payers, or from the IRS, or neglect any notices they send you. If you qualify for the exemption and don't fill out the form, you'll subject yourself to unnecessary tax withholding. If you don't owe any taxes, you'll have to file a tax return to get your 10 percent interest and dividend withholding back.