Adjusting your budget to handle FICA payroll tax increase
Financial planner: Pre-tax savings best way to offset the increase
If you think the FICA payroll tax hike will mean a higher income tax return next year, think again.
Financial experts say your 1040 for 2013 will show a loss in your personal tax refund.
Here’s an example: A two- income family with a gross income of $115,000 and two children will see their refund drop from roughly $2,200 to $600. That’s a 73 percent loss in your tax refund.
Nancy Hecht, a certified financial planner, says the payroll tax was “on vacation” for two years and the new increase could be a budget deal breaker for many Florida families.
“It was real easy to get used to that extra money in your pocket,” Hecht says.
Tax payers need to make adjustments to offset the FICA tax increase that will skew the 2013 tax returns.
In Hecht’s view, increasing your pre-tax savings in a 401K or similar savings plan will nullify the tax increase.
“It depends on how much you make because there is a break point for FICA taxes,” she says.
The Internal Revenue Service confirms the cutoff for FICA is $113,700. Anything a taxpayer earns over that threshold is FICA Free.
Hecht says pre-tax savings is the best investment anyone can make.
The other issue consumers are facing is the immediate hit to their paychecks.
Iris and Jackson live in Oveido. They project a joint loss of $1,150 in spendable income based on the new FICA payroll tax.
Because their 7-year-old son is autistic they are spending more on groceries averaging $700 every two weeks.
Jackson works as a General Manager for a McDonald’s franchise in Lake County. That long distance commute is taking roughly $400 a week out of the budget.
Iris does contribute to her 401-K and the pre-tax savings helps. But unless the couple can make additional adjustments they feel they will never get ahead.
To bring in additional income Jackson and Iris have launched a shopping service for tourists. The company purchases groceries and gifts for guests at the attractions.
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