Save Your Home Budget By Heading Off Taxmageddon
5 Ways to Head Off Taxmageddon & Save Your Home Budget
One of the new buzzwords, “fiscal cliff”, has generated yet another buzzword, and this one is called “taxmageddon”. We’re not too sure who thinks these words up, but they all refer to and describe the consequences that will occur if the Bush era tax cuts that will expire on December 31, 2012, are not extended. This could have an adverse effect on your home budget.
Many economists and tax experts are saying that if Congress and the President don’t act, all Americans can expect to see a rise in their tax bill in 2013. Thus far, from where I sit, Congress and the President have been “acting”, just not in a very responsible way. Each has their own agenda and is unwilling to back down even a little.
Even if they finally agree on a resolution to this fiscal cliff scenario, there will be many Americans who will either see an increase in their tax bill, or they will see more of their money gone from their home budget because of spending cuts in Medicare or many other services. So, who wins? All of this political rhetoric on helping individuals in the middle and lower tax brackets, is nothing more than the usual Washington smoke.
Is this new buzzword, taxmageddon, more rhetoric to raise our emotions to a fever pitch? Many financial experts feel that taxmageddon is very real and will arrive. Some even say that it arrived four years ago when the current administration was elected.
Current estimates now indicate that the average United States household will be paying an additional $3,800 in taxes during 2013 because of all of the changes. So, whatever side of the fence you’re on, tax and financial experts are suggesting that you begin to prepare now by adjusting the home budget. Their top five tips are as follows:
- As best you can, determine how the changes will affect you and your family. Some of the factors that you should consider are your total income, the area of the country where you live, current tax credits, if any, that you qualify for, plus a few more factors. You can find a state by state explanation that was prepared by the Heritage Foundation, who made some interesting projections. They say that the baby boomer generation will be paying approximately $ 4,223 in additional taxes, while the Millennials will pay $1,099 more and retirees $857. In addition to higher taxes or loss of some tax credits, you could also face an elimination of certain tax deductions such as expenses for educators, tuition, and the sales tax deduction.
- Check your withholding. Don’t withhold too little or too much. Getting a very large refund is not a good idea, nor is having a large balance due when you file your tax return. Practically any life changing event such as getting married, having a child, or losing your job and collecting unemployment benefits, can and will affect your taxes. Check and adjust the home budget and your tax bill as necessary to come out even.
- Take whatever deductions you qualify for. Deductions such as a home office, business meals, and auto expenses, if legitimate, can reduce income if filed properly. Sometimes, it may be better if a married couple files separately, although this is rare.
- Increase your retirement contributions. Increasing contributions to your qualified retirement accounts such as 401(k), 403(b), Simple IRA, or traditional IRA’s, will lower your taxable income and also tax liability, plus it will have a very positive effect on your retirement savings balance. There are special provisions for those 50 and over to contribute additional amounts as well. The old rule that says to pay yourself first holds true here.
- Have the funds ready for your future tax bill. After determining your potential liability, either save for that tax bill with your home budget, or if you are required to pay in estimated taxes, be sure to have enough taxes paid in to avoid any penalties.
Be aware as well, that until the Alternative Minimum Tax is corrected and adjusted, more and more of us will be falling into that pit and finding additional taxes staring us in the face. If you are able to determine your potential increase in tax liability now, you may have an opportunity to adjust your spending some to compensate.
If you determine that you’ll have a sizable increase in your 2013 tax bill, and since most Americans will, without any significant changes, then adjusting your home budget now may be appropriate, With the projected increase of $ 3,800 in taxes for each household, that equates to a reduction in spending of $320 per month. Happy New Year.