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'Fiscal Cliff' Interferes With Year-End Tax Plans

DAVID GREENE, HOST:

As we head towards the end of the year, there might be some important financial moves you could make before December 31st so that you don't have regrets come tax time next spring. Year end tax planning is particularly tricky because of all the potential changes that might happen as a result of negotiations in Washington.

For some guidance, we called tax planner Mary Beth Franklin. She is a contributing editor to Investment News, and she joined us here in our studio in Washington.

Mary Beth, thanks for coming in.

MARY BETH FRANKLIN: Thank you for inviting me.

GREENE: One thing we seem to know almost for sure is that we'll be all paying higher taxes because of what's happened to the payroll tax holiday. What does this mean?

FRANKLIN: I believe that the payroll tax holiday, which is the two percent of the FICA taxes that employees pay in their paycheck, that was reduced over the last two years. It used to be 6.2 percent, currently its 4.2. I think that's going to go away. The bottom line, that means if you're earning about $50,000 a year, your paycheck is going to go down by about $20 a week next year. If you're earning $100,000, it's going to go down by about 40.

GREENE: And you're saying that no matter what happens, even if there's a deal on the so-called fiscal cliff, you're expecting that that's going to happen, we're all going to be paying slightly higher and feeling the weight.

FRANKLIN: I believe so, because part of the problem is Social Security is supposed to be self-funding program. Due to this reduced payroll tax Social Security is not actually adding to the budget and that makes the defenders of Social Security very uncomfortable. So I think a lot of people would like it just to go back to the normal tax rate of 6.2 percent for most workers.

GREENE: OK, so everyone should be adjusting their budgets to get ready for next year to be getting slightly less in their paycheck?

FRANKLIN: Exactly.

GREENE: We hear so much in Washington right now, President Obama talks about wanting to raise the tax rate for the wealthiest Americans. Talk about people what people who are in those upper income brackets should be getting ready for, and if there's something they could be doing before December 31st that might make things better.

FRANKLIN: For the upper income people it's basically turning normal year end tax planning on its head. Usually what you say is you want to defer your income, if possible, till next year - things like bonuses - so you don't have to pay taxes on it this year, and you want to accelerate your deductions, for example, contributions to charity, to reduce your income so you'll reduce your taxes. This year, we know what their tax rates are going to be for 2012. We really don't know what their tax rates are going to be for 2013. So some very conservative tax advisors are saying hey, go with the devil you know. As much income into this year, pay taxes on it for 2012, because we know what the rates will be, and maybe you want to defer some of those traditional deductions, like big contributions to charity, till 2013. Because if your tax rates go up a deduction is going to be more valuable to you next year then it will be next year.

GREENE: OK then, let's talk about some of the things that everyone else in the other tax brackets should be thinking about...

FRANKLIN: For the rest of us...

GREENE: For the rest of us.

FRANKLIN: ...great unwashed.

(LAUGHTER)

GREENE: What should everyone else be thinking about as we come to the New Year?

FRANKLIN: Well, for the average wage slaves, like you and I, we don't have a lot of wiggle room of how to move money around and how to affect our taxes. But there are some things you can do.

GREENE: OK.

FRANKLIN: I would start with if you have an employer provided retirement plan at work, like a 401(k) or a 403(b), you still have a few weeks left in the year. Make sure you have put as much contribution in that retirement plan as possible. It will reduce the amount of your income that is subject to tax. But the flipside of that is sometimes people don't have enough taxes withheld from heir paycheck and they get to the spring when they're filing their taxes, and not only do they have to pay extra, sometimes they have to pay a penalty. If you have this sneaking feeling that you're going to owe taxes next year, you can ask your employer to take a little more payroll tax withholding out of your paycheck for December to avoid that tax penalty next year.

GREENE: Mary Beth Franklin, contributing editor to Investment News, thanks so much for coming in.

FRANKLIN: Thank you very much and Happy New Year. Transcript provided by NPR, Copyright NPR.

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