Workers are getting a temporary tax break on the amount they pay into the Social Security trust fund in 2011. The Social Security tax rate has dropped from 6.2 percent of taxable wages up to $106,800 annually to 4.2 percent this year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Here’s how workers are planning to spend their extra 2 percent of take home pay this year.
Daily expenses. Much of the extra money workers received from the tax break in January was spent on more expensive food and fuel prices, a Commerce Department report released in February found. Almost a third of workers (30 percent) say they plan to use their slightly bigger paychecks for daily expenses, according to a Principal Financial Group survey of 1,127 adults employed by firms with between 10 and 1,000 employees.
Save it. Consider direct depositing an extra 2 percent of your pay into a savings or investment account this year. About a quarter (24 percent) of the Principal survey respondents plan to save 2 percent more this year. For someone who makes $50,000 annually, the tax break is equivalent to about $83 per month. The White House says 159 million workers will get an average of an extra $695 in their paychecks this year. The maximum possible tax break a worker could get is $2,136 in 2011, if they earn $106,800 or more.
Fund retirement accounts. This expected $110 billion tax cut was originally supposed to go toward your retirement security, so it makes sense to put it into a retirement account. Some people plan to redirect the funds into a 401(k) or other type of tax-favored retirement account at work (8 percent) or an IRA (7 percent). The Social Security trust fund's finances are not expected to be harmed because the program will be reimbursed for the tax break from the general fund of the Treasury.
[Visit the U.S. News Retirement site for more planning ideas and advice.]
Pay down debt. This extra bit of cash could allow you to pay off your debts faster. Many people plan to use their tax break to pay off short-term (20 percent) or long-term (14 percent) debt.
Stimulate the economy. One of President Obama’s objectives in signing this legislation was to stimulate the economy. A few individuals plan to use this windfall of cash to buy consumer products such as clothing or electronics (3 percent) or a big ticket item (1 percent), Principal found.
Health insurance premiums. Some people didn’t see an increase in their pay this year because other deductions from their checks, such as health insurance premiums, increased and canceled out the extra take home pay they would have gotten from the tax break (10 percent). Additionally, 18 percent of the workers surveyed say they didn’t know there was a reduction in Social Security taxes for 2011, perhaps because other payroll deductions or tax changes resulted in them not getting a bigger paycheck.
The IRS required companies to adjust their Social Security payroll tax withholding by Jan. 31, 2011. Employers that over withheld Social Security tax in January must make an offsetting adjustment to employee pay by March 31, 2011.