So how will the fiscal cliff affect your family? If you are solidly middle class like my family, those expiring tax cuts will find our withholding increasing by at least 15%. Based on an average middle class income, that's an additional $3450 a year in taxes.
There's really not much that can be done about the increase in taxes except to plan ahead. Here are a few strategies that we are implementing now in anticipation of a higher tax burden next year.
Collect on our accounts receivables.
If you own a small business like I do, income is taxed in the year it is received. While normally I don't care if my clients pay me this year or next, the impending fiscal cliff means I'll be taxed 15% more if my clients wait until January to pay. To avoid the added taxes, all my invoices for the past few months have asked for payment in full. Those who are late in paying their bills are getting a friendly reminder call.
Paying down existing debt.
In anticipation of higher taxes in 2013, one of our financial goals this year has been to pay down existing consumer debt. Not only does this save us interest, it also frees up cash that can be used to offset the higher tax burden.
Increase the deposits into our retirement plan.
My husband and I have been investing in real estate as a way to generate some passive income after retirement. For this reason we haven't been making the maximum deposits into our retirement plans which will definitely change in 2013. Increasing the contributions into our retirement plan will provide us with a much needed tax deduction.
Recalculating our budget.
From a dollar standpoint, the fiscal cliff means that our income will drop by $287.50 a month which is a serious chunk of change for any person. This has to be planned for just like groceries, utilities, or other costs which is why drawing up a new budget is a must. I plan on covering this shortage by lowering the amount we pay into debt reduction. Since everything else in our budget has already been pared back to the bone, debt reduction is the only category that has these kind of funds to spare.
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- Budget, Tax & Economy
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