Congress has decided to give many Americans a 2% “raise,” but for 2011 only.
The Tax Relief Act of 2011 is reducing the amount of Social Security tax withheld from paychecks, for the first $106,800 in wages. Previously, it was 6.4% and for this year it will be 4.4%. Essentially, your net paycheck will be 2% more.
At first, I thought only my husband’s paycheck would be affected, but turns out freelancers have a tax break, too.
The self-employment tax will see a temporary reduction from 15.3% to 13.3%.
Since these tax breaks are temporary, I think it’s a good idea to have a plan for that spare 2% rather than absorb it into your regular budget. Otherwise, come 2012, it’ll be harder to adjust to a smaller paycheck.
This could be a good opportunity to boost your debt snowball, pad your savings account, contribute to a college savings account, or contribute a bit more to your retirement account.
Calculate the exact dollar figure you’ll be getting extra this year, and put it as an item in your budget. Pay yourself that amount with each paycheck and allocate it however works best for your family. Just don’t fritter it away!
How will you use your 2% raise this year? We’re putting ours in savings.
For more: The Tax Relief Act of 2011 provisions on About.com
Ideas for your Social Security Tax Break at PTMoney