Is Your Paycheck Smaller Than It Used to Be?

Did you notice something different about your paycheck recently?  For the last two years, we’ve enjoyed a temporary reduction in our Social Security payroll tax of 2%, but that reduction expired at the end of last year, and according to USA Today, that means the average American will see a decrease in income of $100-$150 a month.  For some of you, that might just be enough to wipe out any annual pay increase you would normally receive, but for others that’s just less money available to pay the bills.

Over the last two years, my family has gotten bigger.  I don’t mean I’ve had more children, but that the kids I do have (all four of them) have grown.  As they grow, they eat more, do more, and frankly cost more.  So with my household expenses going up over the last several years, now is not the time for a decrease in take-home pay.

If you’re at a place right now where a decrease in take-home pay can be ill afforded, consider taking these steps to lessen the effect of the expiration of this tax cut:

1.       Review your budget

If you are not in the habit of reviewing your budget periodically, now is the time to do it.  Review your expenses and decide which ones can be reduced to offset the decrease in income.  If you don’t have a budget already, you will want to put one together (see https://secure.financialfinesse.com/go/3760).  Start by tracking your expenses, either by using a spending diary or any number of online money management tools.  Once you have a good idea of where the money is going, you can begin to look for ways to reduce your expenses until the amount you spend is equal to or less than the amount you bring in each month.

2.       Adjust your tax withholding

According to the same USA Today article mentioned earlier, the average American is expected to receive a tax refund on their 2012 tax return of $3,000.  That means the average American will have too much federal income tax withheld from each paycheck, and in essence, is giving the IRS an interest-free loan each time.  If you normally get tax refunds every year, perhaps you would rather get that money back now in the form of a larger paycheck rather than waiting until you file your taxes next year to get your refund.

If so, then use the IRS withholding calculator to adjust the number of allowances you claim on your W-4.  The more allowances you claim, the less income tax you have withheld, thus leaving more money in your paycheck.  Just remember, if you increase your allowances and decrease the amount of income tax withheld from each paycheck, don’t expect that large tax refund next year.

3.       Take advantage of tax-free benefits at work

In 2013, the IRS allows you to contribute up to $2,500 to a health care flexible spending account, which is money that may be used to pay for qualified health care expenses not reimbursed by insurance.  If you must pay for child or dependent care in order to work, you can also save by contributing to a dependent care flexible spending account.  If you participate in a van pool, take a train or bus to work, or have qualified parking expenses associated with your commute, your employer may offer a tax-free commuter benefit that allows you to pay for these and similar commuter expenses with tax-free money—up to $245 a month in 2013.  While it may not help bring your paycheck into parity with last year, using your tax-free benefits will reduce the amount of income you earn that is subject to income AND Social Security tax.

These are just a few ideas to help you deal with an untimely loss of income.  For more tips on how to cope with this year’s tax increases, visit http://www.usatoday.com/story/money/personalfinance/2013/01/09/payroll-tax-cutting-costs-saving-money/1820915/

More like this:

super bowl party with food

How To Throw A Money-Savvy Super Bowl Party

The Philadelphia Eagles will battle the Kansas City Chiefs for the Super Bowl Championship game on Sunday, Feb. 12th, 2023, ...
Read More
super bowl

How To Spend On Special Occasions

How to celebrate Super Bowl, Valentine's Day, and other events without breaking your budget or your heart in this wildly ...
Read More
Young man working

Mindful Money Management

As the world attempts to emerge from the Covid-19 lockdowns and tentatively eases up social distancing restrictions, I noticed something ...
Read More

Subscribe

Be the first to know when new resources are published.