savings

5 ways to beat the payroll tax increase

Reduce taxable income, adjust withholding
Reduce taxable income, adjust withholding © Arvind Balaraman/Shutterstock.com

There are a few ways to reduce your taxable income that don't require taking a pay cut, says Thomas Duffy, principal planner of Jersey Shore Financial Advisors LLC, in Red Bank, N.J. Start by increasing contributions to any tax-deferred retirement plans you have, such as a 401(k), 403(b) or 457 plan. If your employer offers a health savings account, increase your contributions of pretax dollars.

In addition, adjust withholding on your W-4 form so you pay just as much in income taxes as you owe. While you won't get a large tax refund, you'll have more money in each paycheck.

"Getting a large sum back from the government may seem like a windfall," Housser says. "But, it is really an indication that too much is being withheld from your paycheck. In essence, you have allowed the government to hold on to your money interest-free."

Your goal should be to break even with the Internal Revenue Service. To determine how much you should withhold, use Bankrate's payroll deductions calculator.

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