Analysts' advice on tax break: Why not spend it?Thank Uncle Sam for your small pay raise. Included in the tax package that President Barack Obama signed in late December was a one-year, 2 percentage point reduction of the Social Security tax paid by employees. Through 2011, the tax will drop from 6.2 percent to 4.2 percent. If you're your own boss, your tax will drop from 12.4 percent to 10.4 percent.
By: Kara McGuire, Star Tribune (Minneapolis)
Thank Uncle Sam for your small pay raise. Included in the tax package that President Barack Obama signed in late December was a one-year, 2 percentage point reduction of the Social Security tax paid by employees. Through 2011, the tax will drop from 6.2 percent to 4.2 percent. If you're your own boss, your tax will drop from 12.4 percent to 10.4 percent.
Calculations from the tax information company CCH show that a worker earning $50,000 a year will receive about a $1,000 boost, while a worker making at or above $106,800 will receive $2,136.
But most of us won't feel that entire increase because the Making Work Pay credit, which raised paychecks by $400 to $800, has expired. Families with very low incomes may actually see their paychecks shrink, because for them, the payroll tax break amounts to less than the Making Work Pay credit, which was passed as part of the economic stimulus package and phased out starting with individuals making $75,000 or more.
For most people the bump from the new tax break will be absorbed into daily living expenses, paying for higher prices at the gas pump and the like. But if you want to be more deliberate with the money, here are some suggestions from a half-dozen financial planners.
Any personal finance expert would agree that if you have high-interest debt, use the money to pay it down. Padding an emergency cash cushion is always smart, too. And no one would argue if you said you were putting it toward retirement. It doesn't seem as if it would make much of a difference, but the following example proves otherwise. A 30-year-old worker making $50,000 who puts an extra 2 percent into a 401(k) plan for the year would see that money grow to more than $16,000 by retirement, assuming it earned 8 percent annually, according to Principal Financial Group.
But the resounding message I heard from the advisers I spoke to is that if you have your finances under control, take this money and spend it. If everyone does, it would inject $120 billion into the economy. "People have been through some rough times these past couple of years," reasoned Ronald Kohls, a tax preparer with TaxPrep Solutions in Brooklyn Park, Minn. He suggests families go out to eat or take a mini-vacation.
Grant Meyer, financial consultant with Fure Financial in Bloomington, Minn., had several suggestions including buying an e-reader, seeing a play, learning how to make gnocchi or speak Norwegian, or getting a suit professionally tailored. "When we are presented with unexpected money, it is important to remember that maintaining overall health means keeping healthy finances, but it also means taking care of your mental, emotional, physical and spiritual health," he said, adding that he'll use some of the money to buy good running shoes.
Did you quit the gym to slim down your budget? Do your waistline a favor and reinstate it. Scott Kadrlik, an Eden Prairie, Minn.-based certified public account, also suggested using the cash to fund monthly date nights, or to spruce up your home with paint and new light fixtures. "Something that will make you feel good without breaking the bank," he said.
Brad Connors, certified wealth strategist with iWealth in Waseca, Minn., recently replaced his home's windows and thinks that making cost-effective, energy-efficient home improvements would be a good use for the money — purchasing a programmable thermostat or blowing insulation into the attic, for example.
Nadia Keric, a certified financial planner in Edina, Minn., and member of the Financial Planning Association of Minnesota, has made several suggestions for her clients ranging from making extra contributions into a 529 plan to spending $20 on a book of restaurant coupons. Personally, Keric's family will use the extra funds to max out their health savings account.
Last but certainly not least is to put the money to good use for others. People out of work won't benefit from this financial treat. One adviser suggested the peer lending site LendingClub.com. Another mentioned the microlending site Kiva.org. But any number of your local charities that help those struggling to find work and keep their family fed and sheltered are worthy options.