If the New Year arrived with a smaller paycheck for you, you’re not alone. The Social Security tax break from 2011 and 2012 officially expired, and the Social Security payroll tax is now back to 6.2 percent, an increase of 2 percent. This leads a lot of people needing help with payroll taxes.
Those who make more than $113,700 annually won’t feel the pinch, but 160 million workers will and it will cost them an average of $700 a year. A family with a combined income of $100,000 will lose $2,000 income annually.
What are the choices here? Depending on your particular situation, financial planners say you’re going to have to get creative and it won’t be an easy fix.
“For the average person, it’s going to take more discipline than ever to offset this payroll tax hike,” says CJM Wealth Management CEO Charles Massimo.
1. SAVE ON INSURANCE POLICIES
If you’ve been putting off a reassessment of your property, casualty and life insurance policies, now is the time to compare rates. Make no mistake—don’t eliminate the policies altogether, just figure out a way to lower the premiums or inquire about any loyalty programs your insurance company offers. Bundling up your policies with one company could save hundreds. And, if you run into a brick wall you need to shop around other insurance agencies for a better rate.
2. ADJUST YOUR TAX WITHHOLDING
You don’t need to give Uncle Sam an interest-free loan to your money. You could be using the money you pay toward your taxes toward your monthly bills instead of waiting for a fat pay day once a year. Use the withholding allowances worksheet on the IRS official website to find out how much you would need to withhold each paycheck and still keep from racking up a large bill every April.
3. REFINANCE YOUR MORTGAGE
Online calculators at sites like BankRate.com can tell you in a few minutes if you can save money by getting a better rate on your mortgage. The interest rates are still at historic lows, but they won’t last forever. You could save thousands over the course of the year by taking this step. Yes, there are fees involved in the process, but if you have a high interest rate, paying a small cost upfront more than outweighs the money you will save long-term.
4. MAX OUT YOUR 401(K)
If you have a qualified retirement plan at work, contribute the maximum amount to your 401(k) to reduce your taxable wages by the amount you put in. For 2013 you can save up to $17,500 in a 401(k) –that’s a 3 percent increase from last year. If you’re over the age of 50 you can add a contribution of $5,500 for a total of $23,000 this year. Not bad!
5. ELIMINATE YOUR EXTRAS
A $15 monthly gym membership you use twice a month, a cluster of cable channels you never get to watch—they seem like small items and a pain to cancel when there’s always the chance “in the future” you’ll use them more. As Dr. Phil would say, “Get real!” Cancel your auto-pay, use ATM machines only in your bank network to avoid those pesky fees (they do add up!), and cancel any credit cards with high interest rates (if you don’t carry a balance).
Massimo also suggests lowering investment fees by investing in index or exchange-traded funds rather than actively managed funds.