By Rachel Ochman
As the extra bucks from the payroll tax cuts show up in your paycheck, you’ll need to decide whether to spend or save. The agreement reached by Congress last month shaves two percentage points from the Social Security tax withheld from your paycheck—4.2% instead of 6.2%–for one year. Minus the now-defunct Making Work Pay credit, the average employee will bring home an extra $50 a month (higher earners will get more).
The Obama administration chose to distribute this money little by little—rather than as a lump sum—to encourage spending, and studies confirm that money doled out this way is more likely to be spent than saved. But before you piddle those dollars away, a whole host of experts want you to consider other uses. The Tax Blog combed through smartmoney.com’s archives and other media websites for some guidance.
One common theme: money toward your retirement. Theoretically that’s where it would have gone, anyway. Contributing the extra money to a 401(k) or traditional IRA will generate some tax savings. And if taxes increase after the expiration of the Bush tax cuts extensions post-2012, as many experts foresee, the after-tax dollars contributed to a Roth IRA will be “cheaper” this year, as we previously reported.
Paying down high-interest credit card debt is another popular suggestion. The current mood of fiscal austerity has pushed many Americans to chip away at their mountains of debt. November delinquency rates for U.S. borrowers at least a month behind in their card payments fell at Capital One, American Express and Discover, according to the latest monthly data.
Saving for college on your mind? Put those dollars towards education by opening up a 529 college savings plan for your children or grandchildren . You could even ferret the cash away to help pay for an extra certification or graduate-school course that may help you land a raise if not a promotion.
Or, simply stash the cash. The Tax Blog saw campaigns to save for causes like “family fun” and more serious suggestions like saving to pad your personal health care coffer.
Despite all the possibilities, many experts believe taxpayers will spend that little bit of dough without a second thought, stimulating the economy just as Congress anticipated.
Readers, what do you think you’ll really do with the extra money from the payroll tax cut?