How to Beat the Social Security Tax Hike U.S.News & World Report LP Thursday, January 17, 2013
If you've received your first paycheck for 2013, you're probably steamed that your take-home pay was a little short. The fiscal cliff deal passed by Congress and signed by President Obama ended the temporary reduction in FICA tax--the tax that feeds the Social Security Trust Fund. As of January 1, there is a 12.5 percent tax on all earned income up to $110,000, which will be split evenly between the employer and the employee. That means that most of us saw a 2 percent tax increase in our most recent paycheck.
For someone earning $50,000 a year, that's a $1,000 tax increase--or $83 a month they won't have available to spend or save.
We won't get into the merits of whether the tax should have been raised. What we will do is show you six tools that could help you make up the difference in your take-home pay:
Refinance your home. If your home value is higher than your mortgage amount, you could take advantage of low interest rates to refinance. Borrowers with good credit can find loans in the 3 percent range. You can estimate what your new mortgage payment would be using an online calculator, such as the one available on Bankrate.com. Compare the new and old payments to see how much you'd save. Don't forget to subtract any mortgage closing costs from your savings.
Shop your home insurance policy. Your needs may have changed since you last reviewed your policy. Insurance companies change their rates, too. It only takes an hour or so to make sure you have the right insurance and that you're getting the best rate. It's unlikely you'll save the whole $1,000, but you could take a big chunk out of it.
Shop your auto insurance policy. Just as your home insurance. what car insurance you need changes with time. You may be able to handle a bigger deductible, or your older car might not need collision coverage. Rates also vary between issuers, so the TV commercials that say a quick comparison could save you hundreds hold some truth.
Eliminate a monthly expense. Most of
us have monthly subscription services that are built in to our lifestyle; things like premium cable channels and health club memberships. Twenty or $30 a month didn't seem like much when you signed up, but now the savings could be important. Naturally, you won't want to give up the service, so you'll need to look for a way to get most of the benefits at a lower cost. For example, could you give up unlimited text messages if you used more email or made more phone calls? Or do you really need the gym membership for their treadmills if you could find a used one on Craigslist, or better yet, run outside?
Save on routine expenses. There are some budget categories that are large and where we spend money often. Food is a good example. Many consumers shop weekly for groceries. According to the U.S. Bureau of Labor Statistics, the typical American family spent $6,458 or nearly 13 percent of their budget on food. By using coupons, a grocery price book, and purchasing less prepared foods, you could cut your bill by 10 percent or more.
Gasoline is another regularly purchased expensive item. The same BLS report says that you spent $2,655 on gas last year. It may be time to reconsider starting that carpool or using a bike for shorter trips.
Change daily spending habits. We all have daily habits: coffee breaks, a quick stop at the convenience store on the way home from work, or glass of wine with dinner each night. These might seem like small expenses, but they add up. Replace one of those habits with something less expensive. If you save $1 a day by bringing coffee break items from home, you'll achieve one third of your $1,000 goal.
Most of us were ticked to see our take-home pay drop at the beginning of the year. These already challenging times just got a little tougher. But by taking control of your finances you can minimize the impact of the new tax.
Gary Foreman is a former financial planner who founded TheDollarStretcher.com. The site features thousands of articles on how to save your valuable time and money, including more on how to live a more frugal lifestyle .