Payroll Tax Cut. Is it in, or is it out?
In all the rhetorical noise about the fiscal cliff, the discussion has focused most heavily on the Bush-era income tax cuts.
Neither party wants to raise income taxes on the middle class, which has come to be defined as families making below $250,000.
But for workers in that income group, there’s an equally if not more valuable tax cut that expires at the end of this year: the payroll tax cut.
If it expires, it would reduce workers’ paychecks by $115 billion next year, according to the Tax Policy Center.
For example, someone making $50,000 would pay an extra $1,000. Someone making twice that would pay an additional $2,000.
The payroll tax funds Social Security. For the past two years, the payroll tax rate — normally 6.2% — was reduced to 4.2%. In 2013, it’s set to go back to 6.2% on the first $113,700 in wages, up from $110,100 currently.
The tax cut was intended to provide stimulus in a slow economy. It was never intended to be permanent.
Indeed, up until about a month ago, top voices in both parties were saying it was time for the payroll tax cut to end. And Washington policy analysts expected it would be allowed to expire. But just last week, the White House indicated it might like to see a payroll tax cut extension as part of a fiscal cliff deal. House Republicans, however, excluded such an extension in their counter proposal.
Policy analysts say that while one should not discount the possibility of a payroll tax cut extension, it’s by no means a given.
"With the White House clearly holding the trump cards, we think a fiscal cliff deal could include … a compromise that might raise the payroll tax from 4.2% now to something like 5.2% — but not all the way back to the previous 6.2% rate,” Greg Valliere, chief political strategist at the Potomac Research Group, said in a research note.
Sean West, the U.S. policy director at the Eurasia Group, is less convinced. “It’s certainly possible that it gets extended, but I’m still betting against it. It’s something the president put in there to barter away,” he said.
Steve Bell, the senior director of economic policy at the Bipartisan Policy Center, also thinks a payroll tax cut extension is unlikely. But, he said, “some other form of short-term taxpayer help is likely.”
How Dividing Your Savings Can Help You Reach Your Goals
If you’re like most people, you work toward several financial goals simultaneously, yet you keep all your money clumped into a single savings account. But this approach can have some drawbacks. Among them, a single account makes it difficult to track how much is earmarked for each particular purpose, or whether it might make sense at any time to “plunder” the savings for one goal in favor of another.
That’s why I started a targeted saving plan. With an online high-yield savings account (such as those listed at MoneyRates.com), I’ve split my money into several subaccounts, each named for a specific savings goal. Mine include:
- An emergency fund, there to bail me out in case of personal or financial catastrophe.
- A car fund, not for maintaining my current car, but where I make an imaginary payment to myself each month for my next one. (I’ve been eyeing a Mini Cooper.)
- A travel fund,where I save money to support my wanderlust. Any spare cash I have at the end of the month goes here.
Any time I have a new financial goal, I open an additional, targeted account. For me it is a powerful motivator. Because each account has a name and specific purpose, I have an added incentive to pay into it. I’m much more motivated to set aside money designated for a specific vacation than I am to save it for placement into a plain-vanilla savings account.
Targeted accounts also make it easier for me to visualize my progress. When my money is lumped into a single account, it’s tough to know how much more I need to reach a particular goal. But when I look at my statement and see the total in the “Mini Cooper fund,” I know exactly how much is required before those wheels are mine.
Finally, targeted accounts help me to prioritize. For instance, last year, when a trip to Africa was all I could think about, I held off putting money in my car fund and pumped every spare cent into the travel fund. I use an online bank for my targeted savings accounts, but there are other options. Previously I kept my savings at a community credit union. Despite their small size, credit unions offer big benefits, including the ability to open several named savings accounts. And, no, I’m not ashamed to admit that my first targeted account in 2006 was the “Nintendo Wii fund.”
Three Incredibly Simple Rules To Keep The IRS Away
We all have to pay taxes and no one wants any trouble. Follow these three simple rules and you’ll reduce your chances of grief from the IRS:
1. Keep Good Records.
You might think good records help only if you’re audited. Actually keeping good records can keep you out of trouble in the first place. Most audits are by correspondence: your deductions will be disallowed unless you produce records substantiating them. To respond quickly and thoroughly, be prepared
2. Respect Those 1099s.
Much of what the IRS does is information return matching–the endless correlation of taxpayer identification numbers and payments. Even small mismatches will be caught and can trigger bigger problems. There are different Forms 1099 for miscellaneous income (Form 1099-MISC), interest (Form 1099-INT), etc.
How you handle them year round matters. Don’t just stick them in a drawer when they arrive, look at them. If you receive an incorrect 1099 (as is common), contact the payer that issued it. Explain the error and ask if they have already sent a copy to the IRS. If they have, ask for a “corrected” 1099 (there’s a special box for this). You need a system to record and track 1099s. That’s exactly what the IRS does.
3. Keep Business and Personal Separate.
do things with a dual motive like a pleasant lunch with a business colleague, a boondoggle with your best customer or buying a vacation home you also intend as an investment. But your tax life will be easier if you avoid morphing personal into business, including:
· Deducting the cost of your divorce because your business is at risk;
· Deducting a miserable vacation with a client; or
· Claiming your hobby was really for profit.
It’s safer to separate your business and personal lives. Simple but effective.
Get Ready for 5 Key Money Changes in 2013
Potentially painful changes in federal tax and benefit rules are scheduled to take place at the beginning of next year. Taxpayers of all stripes stand to be affected, and the window for 2013 planning is closing fast. With Labor Day just around the corner, it’s not too early to spend some time thinking about your financial planning for next year.
Review these five sets of changes and decide how they might affect you.
The fiscal cliff. Bush-era tax cuts are set to expire at the end of this year. Most of the attention regarding these cuts has involved wealthy taxpayers, but all taxpayers would see higher taxes. At the bottom end of the brackets, the lowest rate of 10 percent would disappear altogether, and the new bottom bracket would be 15 percent. People in the 25 percent, 28 percent, and 33 percent brackets would all see their top marginal tax rates boosted by three percentage points, to 28, 31, and 36 percent. And the top tax bracket of 35 percent would be replaced by a 39.6 percent bracket.
These tax cuts are the biggest component of the “cliff,” but hardly the only one. Automatic federal spending cuts of about $100 billion a year are set to begin as well. Also, Social Security payroll taxes have been reduced for the past two years to help the economic recovery. These cuts—from 6.2 to 4.2 percent of covered wages—are also set to expire, as are extended jobless benefits.
Estate and gift taxes. Wealthy folks can pass on estates of up to $5.12 million but, of course, they have to die to “enjoy” this benefit. Less painful is the fact that this ceiling also applies to a person’s lifetime exemption from gift taxes (and this exemption excludes the $13,000 annual gift exemption allowed for individual gifts each year to as many recipients as you choose). The estate and gift exemptions are set to drop next year to $1 million, and the tax rate on transfers above the exemption ceilings would rise to 55 percent from 35 percent.
Health reform changes. A trio of significant tax changes is set to take effect next year, and thus would be reflected in tax returns due in April 2014. Individuals making more than $200,000 in wage income next year ($250,000 for couples) would see their Medicare payroll tax on amounts above these levels rise to 2.35 percent from 1.45 percent. They would also pay a 3.8 percent tax on net investment income. Lastly, taxpayers who itemize their returns would only be able to deduct unreimbursed medical expenses that exceed 10 percent of their taxable incomes, up from 7.5 percent now. This higher threshold will not apply to taxpayers age 65 and older until 2017.
Medicare enrollment. The enrollment period for 2013 Medicare coverage extends from October 15 to December 7. Health reform has triggered major changes in Medicare Advantage and prescription drug plans. Don’t assume you should keep your current plan, even if it was the best one for you this year. Look carefully at competing plans. Medicare has just revamped its website to make it more helpful and easier to use.
Social Security. The annual cost of living adjustment, or COLA, for 2013 is expected to be announced in early October. The COLA went up 3.6 percent in 2012, its first rise in three years. Low rates of general inflation in the past year suggest that next year’s COLA will not be so generous. In any event, the COLA announcement is linked with 2013 changes in Medicare premiums. Look out for these announcements and use them to plan your 2013 spending and expense budgets.