How to make up for the payroll tax hike
No one likes a pay cut. Here are 5 places you can tweak your budget to make up for the money you've lost. Start by adjusting your tax withholding.
This post is by Sharon Epperson at CNBC.
You didn't imagine it. Your paycheck shrank. Thanks to an increase in payroll tax, more of your pay is going to fund Social Security. You got a break in 2011 and 2012 when the Social Security payroll tax temporarily dropped from 6.2% to 4.2%. Now it's back where it started.
About 160 million workers pay this tax, and this year's two percentage point increase will cost the average worker about $700, according to the Tax Policy Center in Washington. Wealthier taxpayers may actually feel less of an impact, because the 6.2% payroll tax applies to wages only up to $113,700.
Still, for a family with a household income of $100,000, the payroll tax hike means a loss in income of about $2,000 a year.
Financial planners and credit counselors say making up for that loss in income will require some careful planning to cut expenses and increase earnings so it's not such a blow.
"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.
Here are some ways to find money to counter the increase:
Adjust your tax withholding
Start with the IRS. Millions of Americans get big income tax refunds every year when they could have extra money each month. That's money you could use for everyday expenses.
Max out your 401k
If you have a qualified retirement plan at work, contribute the maximum amount to that 401k. You'll reduce your taxable wages by the amount you put in. This year, you can save up to $17,500 in a 401k -- a 3% increase from 2012. Those age 50 and over can add an extra "catch up" contribution of $5,500 for a total of $23,000 in 2013.
Save on insurance
Examine all your property-, casualty- and life-insurance policies and compare rates. Ask your insurance agent about ways to lower premiums, nicluding discounts for loyalty, good driving and bundling multiple polices. Get a second opinion from another agent to make sure you're getting the best rate.
Refinance your mortgage
Rates are still at historic lows, but don't keep waiting for them to go even lower. Take advantage of low rates now to lower your monthly mortgage payment. Online calculators can tell you in a few minutes if you can save money by getting a better rate on your mortgage.
Check all fees
Don't keep paying for things you no longer need -- like that Netflix account your rarely use anymore -- just because they're set up as auto-pay.
Avoid unnecessary charges by not using out-of-network ATMs. Negotiate with your bank for lower fees on your accounts or change banks.
Also, "review all those automatic deposits, especially if you are working with a very tight budget. You want to make sure you are able to meet your basic expenses without incurring any of those high late fees," says certified financial planner Diahann Lassus, the president of Lassus Wherley in New Jersey.
Switch to a credit card with a lower rate. "Make sure you maintain a strong credit score to ensure lowest possible rates," Massimo says.
Massimo also suggests lowering investment fees by investing in index funds or exchange-traded funds rather than actively managed funds.
Finally, no one really wants to get a second job, especially if you have to pay Social Security tax on that money, too. But getting paid to do something fun won't feel like work, and exploring another possible career may prove priceless.
More from CNBC and MSN Money:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers,"
he said, "I'm going to reduce the cost of your daily beer by $20."
Drinks for the ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men? The paying customers?
How could they divide the $20 windfall so that everyone would get his fair share?
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.
And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).
Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.
"I only got a dollar out of the $20 saving," declared the sixth man. He pointed to the tenth man, "but he got $10!"
"Yeah, that's right," exclaimed the fifth man.
"I only saved a dollar too. It's unfair that he got ten times more benefit than me!"
"That's true!" shouted the seventh man. "Why should he get $10 back, when I got only $2? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him.
But when it came time to pay the bill, they discovered something important.
They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.
Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics.
First off this was a temporary reduction in the payroll tax (social security withholding from 6.2% to 4.2% for 2011 and 2012). Since it was temporary, people should have saved this in a retirement account or if they did not have a raining day fund they should have built a rainy day fund.
President Obama made this reduction to make people feel good knowing social security has a cash crunch. This should have been an income tax reduction of 2% for people making say $250,000 a year or less. As it was structured it was a 2% reduction for every person paying social security even for people making over $1M a year. President Obama could have helped the average Joe (people like me and most of you) on a permanent basis. This was Obama smoke and mirrors - that is all he uses.
Today he will surround himself with young children to get people to give up their gun rights. He will say nothing about mental illness,or the fact that Chicago which has one of the strongest laws against gun ownership had the most people killed with guns in 2012 (over 500) then any other city. The criminals and street thugs are the people who have guns in Chicago.
Those who voted for this FRAUD - wait until you see what our country looks like January 2016. It will be ugly - remember, I told you so!!!!!!!!
Anyone who incorporated the payroll tax "holiday" money into their everyday spending budget is a financial idiot and won't be able to move on the recommendations above. Everyone who was smart enough to either retire debt or save the reduced Soc. Sec. tax is most likely doing all of the above anyway.
Kind of a wasted article.
Monte sounds like typical liberal! IT'S A TAX INCREASE! HE RAISED TAXES ON MIDDLE CLASS!
HE LIED! IF HE WANTS MONEY TAX ALL THE BIG SUPPORTERS HE GAVE TAX BREAKS TOO!
STOP GIVING MONEY GO GREEN COMPANIES! STOP SPENDING! STOP WASTING MONEY!
STOP THE FRAUD IN WELFARE FOODSTAMPS OBAMA PHONES ETC....STOP THE CONGRESS
PAYRAISE AND BENEFITS! STOP HIRING GOVT WORKERS! YOU LIBS JUST WANT HIGH TAX
TO SUPPORT YOUR LEFT WING LIBERAL AGENDA THAT IS A COMPLETE FAILURE!
WHERE'S THE SOYLANDRA MONEY? WHERE'S THE GE GMS BAILOUT MONEY? WHERE'S ALL
THE MONEY SPENT FOR STIMULUS? WHO REALLY GOT ALL THAT MONEY?
MONTE SOUNDS LIKE A PMSNBC PROPAGANDA NEWS STORY!
Actually the rich man would have a DRINK SHELTER where he could hide his money and make it appear that he didnt have as much as the sixth and sevent man. He would then end up paying less for his beer!
HOW ABOUT WE STOP KEEPING ALL THE OLD PEOPLE IN THE OLD PEOPLE STORAGE FACILITYS ALIVE THAT HAVE NO QUALITY OF LIFE AND OR DON'T KNOW WHO THE HELL THEY ARE ANY MORE!
Imagine that. The rich get to keep their money, while everyone else has to pay. Go republicans for blocking Obama's "Rich Tax". You definitely got the rich votes now! Too bad you sold out the rest of the country for you own gain. SELL OUTS!!!
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