If Santa Clause didn't come down your chimney with anything good this year, Congress has decided to give you a stocking stuffer for the New Year. With nearly 160 million workers that will benefit from the extension of the reduced payroll tax that passed just before Christmas, it's time to figure out whether you'll be naughty or nice with your gift. The Temporary Payroll Tax Cut Continuation Act temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of your Social Security withholding rate from 6.2% to 4.2% of wages paid through February 29th, 2012. (source: www.irs.gov) Of course, this is supposed to have no effect on your future Social Security benefits. Yeah, right!
If you weren't aware, this payroll tax cut was in effect for all of 2011. This means that for those who earned W-2 income last year up to your first $106,800 of waged income, you actually got a 2% pay raise in 2011. Here's the real question. What did you with your $1,000 to $2,000 pay raise in 2011? Did you save it? Did you spend it? Did you even realize that you actually got a pay raise or was it just like life was merrily rolling along gently down a stream?
Just so most of you understand the game; there are two sides to the payroll tax. 6.2% is generally paid by the employee toward FICA (Social Security) and 6.2% is paid by the employer. Under the payroll extension act, only the employee gets a reduction to 4.2% for the first two months, while the employer still pays the full boat of the 6.2%. If the goal of these types of tax cuts is to create more jobs, how is this going to create incentive for small business owners to hire more people when they don't get any break from this extension?
The current members of our Government are using this in my opinion for just another back handed stimulus package especially when two months of making this change are going to create more work than it probably will do good. Besides the fact that many of the people that get this free money will either spend it or just end up paying off the additional debt they racked up during the holiday season. If you were naughty during Christmas, then please use the cash to pay off your debt. If you were nice during Christmas, then just up your 401(k) contributions by 2% for the first two months and you won't miss the money.
I thought maybe our Government could start the year off with some smart money moves, but it is clear we are back to the same old tricks that helped up rack up this debt. Let's spend more money we don't have, stimulate in areas that don't solve problems, and keep piling on the band-aids. Maybe these guys up in Congress should get stuck in a chimney!
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Written by:
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc
Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice and Smart Money Moves to the X and Y Generation.
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