It's not only wealthy people who have to worry about a possible tax increase due to the fiscal cliff drama. According to a recent article by Kiplinger, we will all have to figure out how to adjust to higher taxes since the so-called "payroll tax holiday" wasn't meant to go on forever. I understand the payroll tax is the levy that pays for Social Security. However, as a Generation-X individual, I rather take a tax cut now and wing it down the road. Instead of complaining, I'm trying to figure out how to adjust to the rise from 4.2 percent to 6.2 percent that appears to be forthcoming. Even if lawmakers change their minds, I'd be naïve to think my income taxes won't increase for one reason or another. I'm estimating our income taxes will increase by at least $3,000 a year based on the discussions coming out of Washington.
Refinancing my home
Even though I'd love to simply enjoy the money I'm saving my refinancing my mortgage, I may not be able to. Once our refinance goes through, we will have an additional cash flow of $300 a month. Ideally, I'd like to use that extra money to pay down our mortgage so we save more money in interest and be mortgage free in 5 to 10 years. However, we may need to put that $300 a month toward income taxes. We would still have our house paid off by the time I'm 55 since we are getting a 15-year loan. Taking advantage of the historically low 2.75 percent interest rate is one way to counterbalance the rising taxes.
Limiting discretionary spending
I know a lot of people use all of their income to pay bills including credit card debts. If taxes go up, I may fall into that group of people as well. I'll have to limit my discretionary spending so that I won't be forced to charge necessities such as food or gasoline. Some of the discretionary purchases I'm eyeing as I prepare my annual budget income the $75 per month gym membership, the $50 a week allowance for coffee shops and $50 a month for the movies.
Reviewing my retirement savings
One of the ways I can lower my tax bill is by saving some money into the 401(k) or regular IRA since it lowers my taxable income. However, in past years it hasn't lowered my tax bill significantly and it basically imprisons money that I may need for emergencies. The last thing I want to do is have to pay a 10 percent early penalty for taking money out of my 401(k) in order to pay a tax bill. I rather be cautious about how much I allocate for retirement savings. Moreover, I'm extremely skeptical that we will even use our retirement money in another 30 years when I can "retire."
Of course, our major money move in anticipation of tax hikes was to refinance our mortgage to lower our monthly payment. That move alone will cover us if our taxes rise by $3,000 a year. However, because I still hope to pay off my mortgage sooner, I rather adjust my spending. Unfortunately, my strategy is not the one that will help our economy recover. If most people take my approach to cut spending, we may end up riding out a prolonged recession. Like most middle-class people, I rather have more money to spend than money that the government takes. I don't control the fiscal policies for the country, just for my family.
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- Budget, Tax & Economy
- income taxes