Protect Your Paycheck
Although the headlines and talk radio focus intently on income tax hikes for the Americans making more than $400,000, the truth is that 2013 brings a tax increase for every American worker who makes even a single $1.
That's right: the 100% of us who have jobs or work for ourselves have to pay more in Social Security payroll taxes this year. Congress and the President decided to permit the payroll tax holiday that we've enjoyed for two years to expire on New Year's Eve. That means the tax rate for employees rises from 4.2% to 6.2% on the first $113,700 of wages; for self-employeds, the rate rises from 10.4% to 12.4%. (Employees owe the tax starting with their first dollar of wages; it kicks in for self-employeds who make more than $433.)
If you make $50,000 a year, you'll pay an extra $1,000 this year in Social Security taxes. If you and your spouse each make $100,000, the extra family hit will be a painful $4,000.
The payroll tax holiday began in 2011 as a replacement for the Making Work Pay tax credit, which was used in 2009 and 2010 to help stimulate the economy. Originally a one-year break, the holiday was extended at the last minute to cover 2012. Extending it again to cover 2013 would have cost about $100 billion ... and lawmakers simply said "no."
Use our calculator to see exactly how much your take-home pay will fall due to the death of the payroll tax holiday. We can't protect you from the tax increase. But we can show most taxpayers how to make sure that less tax, not more, is withheld from 2013 paychecks.
How? By showing you how to limit or eliminate the overwithholding of income tax from your pay. Despite all the complaining about Washington, the undeniable fact is that middle-class Americans continue to allow the government to claim more than its share every payday. The proof: the 104 million tax refunds the IRS issued this past spring. The average check: nearly $3,000! That’s three times the threatened average increase in payroll taxes.
Do the math: By eliminating overwithholding of income tax, the average taxpayer who normally gets a refund can both defeat the paycheck-shrinking impact of higher payroll taxes and add a couple thousand dollars to 2013 take-home pay. (Yes, you’ll be giving up a fat refund in 2014, but wouldn’t you rather get your money when you earn it?)
The easy fix. It's simple to fix overwithholding. All you have to do is file a revised Form W-4 with your employer. The information on that little form determines how much federal income tax is withheld from your checks. The more "allowances" you claim on the W-4, the less income tax will be withheld.
Once you file a new Form W-4 claiming extra allowances, your take home pay should rise on your next payday ... to reflect reduced income tax withholding. There's a good chance that fixing income tax withholding will more than offset the hike in payroll taxes being withheld from your checks.
Ah, but how do you know how many allowances to claim? Worksheets that come with the W-4 will help, and you can get detailed instructions in IRS Publication 919, How Do I Adjust My Tax Withholding? Or you can struggle through the IRS's online withholding calculator.
The Kiplinger Way
But we've got a better idea. If your 2012 and 2013 financial situation is likely to be similar to 2011's, take advantage of Kiplinger's Easy-to-Use Tax Withholding Calculator. Answer three simple questions (you'll find the answers on your 2011 tax forms), and we'll estimate how many additional allowances you deserve. We'll even show you how much your take-home pay will rise starting next payday if you claim the allowances on a new W-4.
Our quick-and-easy method is a helpful guide, not gospel. And it's based on the assumption that your financial life hasn't changed dramatically. If you have a new baby, get a new job or have an adult child who qualified as a dependent in 2011 but won’t in 2012 or 2013, for example, the calculator won't reflect how such events will affect your tax bill . . . and your tax withholding.
But for most Americans, our calculator will paint a reliable picture that should accomplish two important goals:
1) Get you motivated to grab a W-4 to pinpoint how many extra allowances you should claim; and
2) Get you more of your money as you earn it, as well as protect yourself from falling take-home pay due to the demise of the payroll tax holiday. Most people fill out a W-4 when they first take a job and never think about it again. But you can change the number of allowances at any time. You probably should if you received a tax refund of $500 or more -- or if you owed more than 10% of your total tax bill when you filed your 2011 return.