You remember what you did with the big bucks you saved last year thanks to the payroll tax cut, right? You don't? Well, you're not alone.
According to a survey by the National Foundation for Credit Counseling, fully 66% of Americans didn't even notice that their paycheck had been padded. A New York Times/CBS News poll supports that, showing that most people (53%) think that President Obama has kept taxes the same for the majority of Americans, while 24% think he has raised them, and only 12% are aware that he has lowered them.
While many have been hoping for some kind of tax cut from the fellows running for president, we've already been enjoying one. The payroll tax cut that President Obama enacted through The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the bite taken out of our paychecks taken for Social Security by two percentage points (from 6.2% to 4.2%) . For the average American family, that amounts to about $1,000 per year.
Where It Went
The NFCC survey also revealed how those who were aware of the hidden bonus in their paychecks put the surplus funds to use in 2011:
- 53% paid down their debt
- 24% paid off past-due bills
- 12% increased contributions to retirement accounts
- 9% saved most of the money
- 3% treated themselves "to something special"
Those who weren't aware of the bonus probably didn't fritter away the money. According to the Bureau of Labor Statistics, the Consumer Price Index rose 3% during 2011, with food prices rising nearly 5%, gasoline rising 10%, and fuel oil surging 18%. So whether you noticed the bump in your paycheck or not, some of it probably helped you fill your car with gas, heat your home, or put food on the table.
Be Proactive -- and Prosper
The good news is that it appears that this tax break will probably stay in effect through 2012, so you'll likely enjoy that bonus in your paycheck again.
Now that you're aware of it, plan for it so that you put it to the best use. Those in the survey who noticed the savings did just that. Most paid down debt, which is a terrific thing to do. If you can trim $1,000 from the credit card debt that you're being charged 20% interest on, you'll save yourself an additional $200 a year. Paying off overdue bills might prevent your credit rating from getting dinged. That's a big deal, since these days it's not just lenders who care about your credit score, but many potential landlords, insurers, employers, and others, as well. And the worse your score, the higher the interest rate you'll be charged whenever you borrow, which adds up ... and up.
Increasing your retirement-account contributions is also a smart move to make with the extra paycheck padding. Sock away an extra $1,000 today and if it grows at 8% annually, on average, over the next 20 years, it will turn into more than $4,500.
Funneling the money into an emergency fund is another wise financial step. It's best to have easy access to at least three to six months' worth of living expenses, in case you lose your job or face some other financial calamity.
These moves are smart for your payroll tax break -- and also for any other windfall you may receive or just for the money you are able to sock away week by week and month by month. Expecting a sizable tax refund soon? Plan to put it to work effectively for you.