You may have recently heard the news the federal income tax rates won’t be increasing in 2011. They’ll remain the same for the next 2 years which is a stimulus to keep the economy from dipping back into a recession.
Tax Cut Bill
In fact, there will be some changes to your paycheck starting in January that could help you make some headway towards your financial goals if you use the money wisely.
According to CNNMoney.com, President Obama signed a 1 year tax cut bill into law that will reduce the amount of money you pay into Social Security each paycheck.
Workers normally pay 6.2% on their first $106,800 of wages into Social Security. As a result of the tax cut deal passed by the House on Thursday night, they will only pay in 4.2% in 2011.
So, for every thousand dollars in wages per paycheck up to the cap, one would only have $42 withheld (4.2% x $1,000), rather than $62 (6.2% x $1,000).
However, according the article, you might not see the breaks in your first paycheck. Obama signed the tax cut into law late in the month and it takes some time for employers to change their payroll system.
Employers have until January 31st to adjust their systems. For any social security taxes over withheld your employer has until March 31st to make an offsetting adjustment.
The Good and Bad of the Tax Cut
It will be nice to have the extra money this year to help save more for a lot of wise personal money managers. Certainly, some of the extra money may be used as items are needed for families. Many families will just spend the money.
But, is a tax cut really a good thing overall? According to an article on YahooFinance.com, it will be the taxpayers who pay the price in the long-run.
In the long term, it is taxpayers who will pay the price in the form of inevitable future budget cuts, probable higher taxes, and possibly a reduced standard of living. But for now, Congress and the White House are sharing the role of Santa Claus, and Americans can’t wait to rip into their gifts.
In other words, some measures will eventually have to take place to help reign in government spending and pay off our national debt.
Will everyone get the benefit? Not so, according to the YahooFinance article:
But not everyone will benefit from the payroll-tax holiday. Workers who do not participate in the Social Security system, such as some public-school teachers and many civil servants, will see no reduction in their payroll taxes. And some federal employees will get hit with a double whammy: no break on payroll taxes and a wage freeze next year.
Also, keep in mind the tax benefit you receive will depend on if you qualified for the expiring Making Work Pay credit. Lower income workers will get the tax benefit but it may not be as much as they would have received for the Making Work Pay credit in 2010. You might actually be paying more in taxes in 2011. Here’s an example from Yahoo:
For example, a married couple making $36,000 will see their payroll taxes reduced by $720 in 2011. Compared to the $800 Making Work Pay tax credit they enjoyed in 2010, their taxes would increase by $80 next year. But for an individual earning $36,000, that same $720 reduction in payroll taxes in 2011 will represent a $320 tax cut compared to the $400 tax credit he or she enjoyed in 2010.
Don’t get me wrong, I’ll be happy to have the extra money in my paycheck this year. But, such a tax cut concerns me in that it doesn’t seem to help get the national debt under control created by our government.
Photo by nikoretro.
What do you think of the new tax cut law?
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