Paychecks are getting smaller. While many Americans are breathing a sigh of relief that their income tax did not increase, there is nonetheless a tax increase that will impact all paychecks.
The Social Security payroll tax rate was reduced for 2011 and 2012, with the employee contribution cut from 6.2 percent to 4.2 percent. The intent was to put more money in people’s pockets, thus stimulate spending. The rate will now increase to the former level, resulting in smaller paychecks for American workers.
“If a person was fortunate enough to have received a pay raise, it’s likely that this Social Security tax increase will wipe out most of it,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC). “Americans, particularly those already living on the financial edge, need to act fast to adjust their budgets accordingly.”
To help consumers find extra money to offset the tax hike, the NFCC suggests exploring the following areas:
• Adjust withholding – Millions of Americans receive large income tax refunds each year when they could have extra money each month. Calculate the proper number of withholding allowances by utilizing the worksheet at www.IRS.gov.
• Pay with cash – People who pay for purchases with cash typically save 20 percent compared to previous credit spending, and never feel deprived.
• Refinance the mortgage – Take advantage of historically low rates to reap a lower monthly mortgage payment.
• Ten dollars from 10 categories – Carving $10 off of 10 spending categories is a painless way to find extra money.
• Do it yourself – Small savings add up. Stop paying for things you can do yourself such as washing the car, cleaning the house, or mowing the lawn.
• Stop bad habits – Make good on those New Year’s Resolutions to stop smoking, drinking, and playing the lottery.
• Clean out the storeroom – It’s a double-play to sell the contents of the storeroom, thus eliminating the need for extra storage. Money in the pocket from the sale, and no more rent payments.
• Save on insurance premiums – Examine all policies and compare rates. Inquire about ways to lower premiums, and ask about any discounts for loyalty, good driving and the bundling of multiple polices.
• Examine bank statements – Don’t continue to pay for things no longer needed just because they’re set up as auto-pay. Avoid unnecessary charges by not using out-of-network ATMs. Negotiate with the financial institution for lower fees or change banks.
• Earn extra income – Getting paid to do something fun won’t feel like work, and honing a skill can pay dividends beyond financial.