Since the elections in November, the news has been filled with warnings about the fiscal cliff–a series of tax cut expiration and spending cutbacks set to take place January 1. America has waited for a solution to be passed, but as of this writing, no deal has been made. While it is difficult to prepare for what 2013 will look like financially when no one knows the rules yet, here are a few things I have been doing in the meantime.
1. Keep Yourself Informed on What May Impact You
There is a multitude of information on the internet about which tax breaks will be expiring and which taxes will be increasing, but not all of them will affect every person. Know what potentially could cause you problems, even if it’s possible that they may not actually come to fruition in 2013. For example, any child credits set to expire will not be affecting me in 2013 since I don’t have any children, so there is no need to worry about that. However, the temporary 2% decrease of Social Security tax will affect me and will almost certainly not be extended with any deal that is passed. As such, I can begin preparing for 2% less takehome pay in 2013.
2. Plan Your Taxes
It is always good advice to plan your taxes out so you get no or only a small refund. Regardless, the average tax return is still $2700, which means most people do not pay very close attention to how much their tax liability will be. There is a helpful calculator at www.irs.gov that will aid you in figuring out the appropriate exemptions you should take. Your payroll department at work can likely help you work through the worksheet on the W-4 (used to set your exemptions). Since it is likely that the landscape will change in the next few weeks, it will be important to look at your exemptions later in the year as well to make sure you aren’t having too much withheld. While you may be sacrificing a large refund in April 2014, your cash flow in 2013 can remain relatively unaffected if you plan correctly.
3. Plan Your Budget
After you’ve taken a look at points 1 and 2, take another look at what you are spending and begin making changes now. Your paycheck may not significantly change immediately in 2013 due to some delays in getting updated tax tables because of all the debate as to which credits will be extended and which ones will not be. This may mean that your paycheck may be impacted even harder once the changes are made. Plan now as though your paycheck will be going down to to higher taxes, and spend and save accordingly. If a deal is reached and you’ve got additional savings, even better–you’ll never regret having saved for the future. Trim now while it’s not as urgent to prepare for what may be around the corner.
Hopefully, Washington will make a decision soon about what taxes will look like in 2013 so we all can better know what to expect. However, in the meantime, it only makes sense to do what you can to be prepared for the cliff. If no deal is reached, it will take some getting used to the new tax laws, and the sooner we all begin making those adjustments, the easier the transition will be.