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Pumping up a shrunken paycheck

By Kemberley Washington ·
Thursday, January 10, 2013
Posted: 7 am ET

While Congress did not let us fall over the "fiscal cliff," our paychecks have already taken a dive.

During the eleventh hour, Congress passed the American Taxpayer Relief Act of 2012 to prevent costly income tax increases for most Americans. The legislation also halted the expiration of certain tax credits and aid, such as unemployment benefits.

However, individuals who earn more than $400,000 and families with more than $450,000 of income can expect an income tax increase. People at those income levels will now pay a top rate of up to 39.6 percent in income taxes.

Payroll tax holiday expiration

While most people will not see a rise in income tax rates, they can expect to pay more in payroll taxes. In 2010, Congress implemented a payroll tax holiday that reduced payroll taxes in an attempt to help stimulate the economy. Payroll taxes fell by 2 percent for both wage earners and self-employed individuals. The holiday expired at the end of 2012 and has not been renewed by Congress.

As a result, an individual who earns $50,000 can expect to pay approximately $1,000 more in taxes, and an individual who earns $100,000 can expect to pay about $2,000 more in taxes for the new year.

Squeeze the most out of your paycheck

We have no control over what Congress does. However, we can take control of our paychecks. Making certain adjustments can ensure you get the most from each paycheck. Here are a couple of tips.

  • Check your withholdings. Adjust your withholdings to break even at tax time. While it may feel great to get a tax refund, you are essentially allowing the government to use your money "interest-free." Use the Internal Revenue Service's withholding calculator to make certain you are withholding the correct amount. Then, apply tax savings toward your financial goals.
  • Use an FSA. If your employer provides a flexible spending account, or FSA, take advantage immediately. Participating in an FSA will allow you to pay medical or child care costs with pre-tax dollars. For example, if you set aside $50 from each paycheck into an FSA and you are in the 25 percent tax bracket, you can save approximately $16 toward qualified spending, since you are also saving on payroll taxes.

Remember: your choice, your future!

Kemberley Washington is a certified public accountant and a business professor. Subscribe to her personal finance blog at or follow her on Twitter.

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