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Cliff-side Financial Resolutions

By Nancy Arsenault

While lawmakers were able to make a last minute save from a free fall off the so-called fiscal cliff, there are still changes to the tax laws that will affect most people’s pocketbooks now, with potentially more to come. Making and sticking to financial resolutions can make any future financial challenges less painful.

Financial experts recommend a personal review of spending habits and living expenses, finding ways to save and noting easy steps that everyone can take, regardless of income level.

Start each week with a well thought out meal plan and shop accordingly, taking note first of what’s already on-hand in the kitchen. The plan should involve eating at home more and eating out less.  Lower the thermostat and put on a sweater and slippers.  Consolidate errands to save gas. Start clipping coupons and pay down that credit card debt, especially on cards with high interest rates.  And maybe most importantly, start socking money away into savings.

“Generally for retirement planning, 15% to 20% of income should be set aside for retirement. Individuals who are W-2 wage earners and covered under an employer-sponsored retirement plan should max out their annual contribution to those funds,” said George McKenna of Stow Brook Business Services, LLC, a Stow firm that assists individuals and businesses with tax and financial planning.  McKenna is a company partner and has been a professional in the field of tax planning and preparation for thirty five years.

McKenna said his office works with many self-employed individuals and small business owners who often find their tax situations to be an overwhelming responsibility. “For the self-employed or small business owner, I generally recommend that they open a separate bank account to set aside money each week for their estimated quarterly tax payments. Their set aside funds should be a calculation of their monthly net business income times their effective annual tax rate,” he said. This preparation ensures that when tax time rolls around, money owed to the government will already be set aside, if not pre-paid, and will not be a surprise that creates an immediate financial hardship, or even an impossible situation if funds have already been spent.

McKenna also advises to pay down that credit card debt. Start by paying the card with the smallest balance. Once that is paid off, apply that payment amount to the next largest, along with additional money.  Look at the interest being applied to your balance and pay much more than the minimum required. A $50 minimum payment on a $2,500 credit card bill, at 18% interest, will take 34 years to pay off and you’ll have paid $6,430 in interest.

There are several websites that can easily calculate what it will take to pay off your debt. Visit cardhub.com and input your information. That website reports that the average household carries $6,700 in credit card debt, which, at an interest rate of 20 %, would cost $621 a month to pay off completely, in just one year. Of course, that is considering that the card will not be used for additional new charges in that time period.

Another highly recommended website is Mint.com;  a free site that will help you to create a budget, tracking where your money goes as you spend in easy-to-understand charts. It also helps you track progress on financial goals such as paying off student loans, saving for a vacation or for buying a home.

As for the changing tax laws, McKenna offers this summary of changes that went into effect on January 1, 2013:

1. The top income tax rate increases from 35% to 39.6% for individuals with

taxable income in excess of $400,000 and married couples with income in

excess of $450,000.

2. The capital gains and dividends tax rate increases from 15% to 20% for

taxpayers as described in #1.

3. A phase out of 2013 itemized deductions applies for individuals with

adjusted gross income (AGI) of $250,000 and married couples with AGI

of $300,000.

4. The social security payroll withholding tax increased from 4.25  to 6.2%

and the social security wage base increased to $110,100/

5. The lifetime gift exclusion is $5,000,000 but the top bracket gift tax rate

increased  to 40%.

Several tax rate changes became effective 1/1/2013 as a result of the 2010 Health Care Reform legislation.

1.  A new payroll tax of .9% on wages in excess of $250,000 for a married couple

and $200,000 for a single taxpayer.

2. A new Medicare tax on net investment income of 3.8% for taxpayer’s whose

modified adjusted gross income exceeds $250,000 for married couples and

$200,000 for single taxpayers.

“The fiscal cliff still involves much uncertainty not only within the next two months but also long-term until a sustainable solution is reached,” said McKenna. “Whatever solution is agreed upon will involve changes to the tax code, thus the need for sound and effective planning.”

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