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Tips to Adjust to a Lower Paycheck Due to End of Social Security ‘Tax Holiday’

Americans are receiving less money in their paychecks in 2013, a result of the end of the social security tax holiday that took effect in January. Under the tax holiday for the last two years, an employee earning about $50,000 annually saved $1,000 a year, or a little more than $19 a week.  (1) With the end of that provision, paychecks across the board are now lower by two percent.

Lakeland Bank offers tips which may help you to make up the difference in take home pay and may even save you several hundred dollars a month. With careful planning and budgeting, you may actually come up ahead this year.

Tip #1: Evaluate your W-4 withholding and/or quarterly estimates to see if you can withhold less for federal income taxes. Doing so would increase your monthly take-home pay but would reduce your federal tax refund when you file your 2013 taxes. This option is recommended only for individuals who usually receive a tax refund. Evaluate your options with a tax professional before making any changes to your W-4.

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Tip #2: If you are expecting to receive a tax refund for 2012, fill out your tax return as soon as possible. To receive your refund sooner, you can opt to have the funds electronically deposited to your checking or savings account. If you had earmarked this refund towards a big-ticket purchase, consider saving it instead to meet the shortfall in your budget due to lower take home pay.

Tip #3: Life events such as a change in marital status, having a child, buying/selling real estate or stocks, and even changes in earnings may have a significant effect on your tax return. Have you experienced (or will you) any of these events and, if so, are you receiving the tax benefits/deductions that may go along with them? Meet with a certified financial planner to make sure you maximize the financial benefits that go along with these events.

Tip #4: Keep track of credit card rates and bank fees. If you carry a credit card balance, switching to a credit card with a low APR may save you money. Most checking accounts now charge a monthly fee so find one with a low fee or one that offers other benefits that offset these fees.

Tip #5: If you have a mortgage, consider refinancing. Rates are at historic lows, so refinancing your mortgage may provide some breathing room each month. The general rule is that if you can refinance one percentage point less than your current rate, then it may be worth refinancing. Speak to a residential mortgage consultant to find out if this is a good option for you.

Here is why your paycheck may be lower this year:

What changed? For 2011 and 2012, wage earners were granted a payroll tax holiday to stimulate the economy and paid 2 percentage points less in Social Security tax. On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8). This legislation does not include an extension of the 2 percent payroll tax cut for the Social Security (FICA) employee tax.

What does this mean for you? Starting Jan. 1, 2013, Social Security tax withholding rates for employees returned to the original level of 6.2% (up from 4.2%). The total taxable wage amount has also increased from $110,100 to $113,700 wage base. Of the approximately 163 million workers who will pay Social Security FICA taxes in 2013, nearly 10 million will pay higher taxes as a result of the increase in the taxable maximum, according to the Social Security Administration(2) .

How much will it cost? As an example, workers earning $40,000 (average annual income) will see about $67 less in their monthly paychecks, $800 for the year. Additionally, self-employed individuals will need to make quarterly payments using the combined Social Security and Medicare tax of 15.3% in 2013. Try this Wall Street Journal Calculator to estimate out how much additional Social Security tax you will pay in 2013.

About Lakeland Bank

Lakeland Bancorp, the holding company for Lakeland Bank, has an asset base of approximately $2.9 billion and 46 offices spanning six northern New Jersey counties: Bergen, Essex, Morris, Passaic, Sussex and Warren. Lakeland Bank offers an extensive array of consumer and commercial products and services, including online banking, localized commercial lending teams and 24-hour or less turnaround time on consumer loan applications. For more information about the bank’s full line of products and services, visit their website at LakelandBank.com.

1http://www.nbcnews.com/business/economywatch/payroll-tax-holidays-end-could-weigh-weak-economy-1C6608952

2Social Security Administration Press Office. (October 2012). Social Security Announces 1.7 Percent Benefit Increase for 2013 [Press Release].

 

 

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