New Year, big fiscal changes

Michelle Singletary
Columnist January 3, 2013

Enough.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

That’s probably the word you’ve used to express your frustration with the fiscal cliff negotiations. And now we all have to digest what was agreed to and how it will affect our finances.

Lori Montgomery and Rosalind S. Helderman of The Washington Post report on the changes that prevented tax increases for millions of middle-class taxpayers from taking effect this month. But the deal does increase tax rates on wages and investment profits for households earning more than $450,000 a year.

The Washington Post’s Suzy Khimm has put together a fiscal cliff deal cheat sheet. Here are some of the details in the bill:

-- Tax rates will permanently rise to Bill Clinton-era levels for families with income above $450,000 and individuals with income above $400,000. All income below the threshold will permanently be taxed at the George W. Bush-era rates. That means that income above the $400,000 would be taxed at 39.6 percent, up from the current top rate of 35 percent.

-- The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold – the new definition of wealthy. It will remain at 15 percent for everyone else.

-- Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks.

-- Personal exemptions and itemized deductions for income above $250,000, or $300,000 per household are capped.

The bad news for everyone is that payroll taxes will go back to 6.2 percent from 4.2 percent. So, how much will your paycheck be affected? The nonpartisan Tax Policy Center estimates that 77 percent of Americans will see higher taxes because of the elimination of the payroll tax cut, meaning $115 billion less in disposable income, reports the Los Angeles Times.

In real numbers, that mean families earning $50,000 to 75,000 a year will have $822 less this year than in 2012, according to the Tax Policy Center. People making $75,000 to $100,000 will see $1,206 less in their paychecks, while those making $200,000 to $500,000 will see a drop of $2,711 in their paychecks.

I would like to hear from you. The Color of Money Question of the Week: How will the fiscal cliff deal affect you? Send your comments to colorofmoney@washpost.com. Put “Fiscal Changes” in the subject line. Please include your full name, city and state.

Chat Today

Join me today at noon ET for a live online chat with C.C. Chapman, author of the Color of Money Book Club selection for December, “Amazing Things Will Happen: A Real-World Guide of Achieving Success and Happiness.” Here’s the review of the book, if you missed it.

If you can’t make the chat live, you can read the transcript later.

Retirement Tax Changes for 2013

If you actually do have any extra money, you can contribute more to your retirement plan this year.

To keep up with inflation, the Internal Revenue Service announced that the annual limit on contributions to 401(k) plans is rising to $17,500 from $17,000, reports Jia Lynn Yang of The Washington Post.

Annual contributions to IRAs, both traditional and Roth, are increasing to $5,500 from $5,000, the first time since 2008 that the limit has gone up.

For those over 50 years old, the additional “catch-up” amount allowed will remain the same at $5,500, meaning the overall limit for such workers will rise to $23,000 from $22,500, Yang reports.

The IRS has also expanded the number of people who are eligible to contribute to Roth IRAs. For married couples, the upper income limit will rise to $188,000 from $183,000. For singles, the limit will increase to $127,000 from $125,000. (All amounts are adjusted gross income.)

The limit on tax-free gifts is going up to $14,000 from $13,000.

The Financial Goal Getter

You’ve made your financial resolutions for New Year’s right?

But do you have a plan to achieve those goals? If not, Pamela Yip, personal finance columnist for the Dallas Morning News, offers the following tips:

-- Assess your situation. Figure out where your money is going.

-- Divide your goals. Don’t try to do everything this year. That’s only going to make you frustrated. You probably can’t build up an emergency fund in one year. So just start with a short-term goal of saving as much as you can this year. Short-term goals are 12 months and sooner. Interim goals are something in the next two to five years, and long-term goals — such as retirement — could be 10 years away, 20 years away

-- Set priorities. When dividing your goals, keep things in perspective. Here’s an example from one expert Yip interviewed. Let’s say your three short-term goals for 2013 are to pay off the holiday debt, replace a broken backyard fence and take a family trip during spring break. “Two of those are needs — debt reduction and home repair/upkeep — and the trip is a pure want,” said Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas. “Because the spring break trip is in March, 11 weeks away, with an urgent timeline, that want feels like the highest priority, even though it should probably be the last of the three.”

Not probably. Taking the family trip should be the lowest priority.

At any rate, the point is you have to have a plan if you want to succeed in keeping your financial New Year’s Resolutions.

Family Financial Fights

It’s a new year, but your family is still dealing with the same old financial drama.

If so, I can offer some advice on how to work through the issues.

Send your Family Financial Fight stories to colorofmoney@washpost.com. Be sure to include your full name, city and state and put “Family Finance” in the subject line.

Monday Morning Money Quarterback

For the last Color of Money Question of the Week, I asked you to weigh in on two letters that were sent to syndicated advice columnist Amy Dickinson.

In the first letter, a wife wanted advice on how to deal with a spendthrift husband. The second letter writer, a bridesmaid, wanted advice on how to tell her friend the bride-to-be that she can’t afford the price of her out-of-town bachelorette party.

Lorna Gilkey of Alexandria, Va., offered some good advice to both writers.

“To the lady in the first letter, I’d say she should have discussed issues like that before getting married. Pre-marital counseling solves a great many issues before they can begin. And to the bridesmaid, simply say you appreciate being chosen to stand by her on this wonderful day, but cannot afford the out of town expenses.”

Tia Lewis contributed to this report.

You are welcome to e-mail comments and questions to colorofmoney@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.

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