In between all the holiday presents and New Year’s partying, you were probably continuously reading or hearing about the fiscal cliff deal and the impending vote on it. You might even have been wondering what, exactly, it is. And if you haven’t been thinking about it — well, you should be. Here’s why.
The term “fiscal cliff” is used to describe the decision the U.S. government had to face at the end of 2012 when the terms of the Budget Control Act passed in 2011 were scheduled to go into effect. This included temporary payroll tax cuts (resulting in a 2 percent tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax, a rollback of the “Bush tax cuts” from 2001-2003, and the beginning of taxes related to President Obama’s healthcare law. Plus, spending cuts on over 1,000 government programs agreed upon as part of the debt ceiling deal of 2011 are slated to go into effect. But basically the tax increases were what everyone was freaking out about.
But on January 1 Congress voted to permanently preserve the Bush tax cuts for nearly 99 percent of taxpaying households, just not that top 1 percent. The deal moderates tax increases and spending cuts that would have amounted to more than $600 billion in 2013. Wall Street was pleased with this package, but CEOs and economists said it wasn’t enough. So how does all this impact the lifestyle of a young, working woman like yourself?
We spoke with Elizabeth Oviedo, the marketing manager for Symmetry Software, creators of payroll-related software for the Internet and corporate intranets. Elizabeth is a 26-year-old, newly married graduate of Georgetown who knows the lowdown on what this new deal means for women. Here’s what she told us:
Most young women only need to know that their paychecks will decrease by at least 2 percent due to the expiration of the payroll tax holiday.* That’s because the social security tax (referred to as FICA) is 6.2 percent, when it previously was 4.2 percent. For a young, single woman making $50,000 a year, this means her take-home pay will be about $38 less each paycheck. This doesn’t sound like a lot, but for me it means turning a girls’ night out into a girls’ night in twice a month.
And while receiving a fat tax refund check is thrilling, young women are better off making that money work for them (instead of Uncle Sam) throughout the year. With the changes from the fiscal cliff, now is a great time to look at your pay stub to make sure you aren’t withholding too much money from your paycheck for taxes, causing you to get a large tax refund. If you are in this boat, you should revise and submit to your employer your Form W-4 to lower your withholding. Don’t provide an interest-free loan to the government by withholding too much for taxes, put that money to work for you! (Like in a savings account or to you 401(k)).
If you are a single young woman lucky to be earning $400,000 or more (or married earning $450,000 or more) connect with a tax advisor to see what tax implications the fiscal cliff has for you as this is where it starts to get messy. Folks at this level are subject to an increased tax of 39.6 percent, up from 36 percent on any income above this threshold. This group is also subject to an additional .9 percent medicare tax, which starts at the $200,000 income level for singles and $250,000 for marrieds.
Speaking of, if you are experiencing a significant life event, like getting married or having a baby, this impacts your tax liability (your taxes actually go down!), so it is extra important to revisit your Form W-4 to make sure that you are withholding the correct amount of money each paycheck to correctly cover your total tax bill.
Basically you need to pay attention to your paycheck because it could change your budget. You also need to understand the impact of new legislation on healthcare laws. The bottom line is women need to keep themselves in the know about how their salary and healthcare will be impacted.
Photo courtesy of Nettie Rose
Will you change your paycheck following the fiscal cliff deal? Tell us in the comments.