Get Here: Why Your Tax Withholding Went Up

Wednesday, January 12, 2011

Why Your Tax Withholding Went Up - Bargaineering

Posted: 12 Jan 2011 09:36 AM PST

There have been a lot of commenters wondering why their tax withholding went up this year after hearing about the stimulative 2% payroll tax holiday passed last year. The 2% payroll tax holiday reduced the normally 6.2% Social Security withholding to only 4.2% but some people have seen their withholding go up. What gives?

Last year, the Making Work Pay credit reduced everyone’s income by 6.2% up to $400. Anyone who earned over $6451 received a maximum $400. That credit expired this year and was effectively replaced by a 2% reduct that had a much higher ceiling, $2,136.

How the difference affects you:

If you earn more than $20,000, then you should see a reduction in your withholding because a 2% of $20,000 is $400.
If you earned less than $20,000 then you’ll see an increase in your withholding because the 6.2%, even with a $400 cap, is higher than the reduction of 2% in Social Security.

Finally, your employer may not have implemented the payroll tax holiday yet, the IRS gave them a January 31st to fix it with any differences reconciled by March 31st. While your Making Work Pay credit has definitely been removed, the payroll tax holiday may not be implemented yet.

Who said taxes weren’t fun?

Why Your Tax Withholding Went Up from personal finance blog Bargaineering.com.

Debt Free for Life by David Bach

Posted: 12 Jan 2011 04:18 AM PST

Debt Free for Life is David Bach’s latest personal finance book and the first, as far as I know, that focuses entirely on the subject of debt.

David Bach’s most well known book is The Automatic Millionaire, which pushed the idea that the easiest way to “get rich” was to put it on autopilot. Automatic savings, whether to a bank account or a retirement account, is the key to a prosperous retirement. It’s one of the powerful pieces of personal finance out there. Since then, he’s written Start Over, Finish Rich which has spawned a whole “FinishRich” line of books, live events, and coaching.

In previous books, it was always about putting together a system that sets you up for the rest of your financial life. Set an automatic monthly contribution to your 401(k), check in each year to rebalance, and retire comfortably (that’s the skeleton, you have to put the meat on it by researching investments, etc.). This is one that focuses entirely on debt, how to pay it down faster, how to get out of it (from legally walking away to working with debt settlement companies), and how to stay away from accumulating more debt in the future.

DOLP Method

The chapter in the book that I think most debtors would find value in is Chapter Five: The DOLP Method: How to Pay Down Your Debt in Record Time and it’s a system that Bach has written about before. DOLP stands for Done On Last Payment and it establishes an entire framework for paying down your debt. You begin by collecting all of your debts to put into your DOLP worksheet. It’s really nothing but a list of accounts, balances, minimum monthly payments, due dates, and two figures called DOLP Number and DOLP Ranking. The DOLP Number is the balance divided by the minimum payment. The ranking is a ranking from smallest DOLP Number to largest. You pay the minimum on everything and then pay as much as you can on the highest ranking DOLP Ranking.

If this sounds a little like Dave Ramsey’s Debt Snowball, you’re close… this is a wrinkle on the idea. Instead of paying the lowest balance, which may have the highest DOLP ranking, you pay the one that can be paid off quickest with respect to minimum payments. A DOLP Number of 10 means you are 10 payments away from paying it off. As you can see, it’s close but not the same.

In summary, I think it’s a good book from an accomplished author and certainly worth a look (Google Books seems to have excerpts you can check out) if you are in debt and can’t figure out how to get out.

Debt Free for Life by David Bach from personal finance blog Bargaineering.com.