Apr 2, 2009

How to make the most of the latest tax cut

Have you benefited from the tax cut in President Obama's stimulus package? My most recent paycheck reflected it. Marc's did too, and together we're looking at a little over $100 more in take home pay each month.

I think reducing payroll deductions is a much better way for the government to implement a tax cut – far more efficient than sending out a letter and/or check to each taxpayer, as with last year's stimulus payment.

On the other hand, though, there was something far more satisfying about getting that $1200 check in one fell swoop. Last year, that stimulus payment helped us buy a new car. This year, the same payment would have helped us pay off my student loan that much faster.

Unless you're tracking every dime – and admittedly, more people than ever are – it's easy to lose track of an extra $50 or $100 per month in income, especially spread out over multiple paychecks. So how do you make sure you don't just spend it away on frivolous things? Here are some ways to make the most of the latest tax cut:

Increase your retirement contribution. - If you contribute to a Roth IRA or 401(k), it's easy enough to increase your retirement contribution by the same amount of your tax cut. I'm sure there's some calculator out there that can tell me how much I need add to my 401(k) contribution in order to zero out the increase in take home pay, but I just roughly estimate that I lose 40% of my gross pay to taxes. $100 in take home pay would equal $167 in gross pay, so that's the amount I would increase my contribution by.

Have the money automatically deducted into savings. - You should already have an automated savings plan set up, implementing the "pay yourself first" philosophy. So to make sure you save your tax cut, just increase the amount that's transferred automatically by the amount of your tax cut.

Set up an automatic investment. Similar to the last suggestion, this one sends the money to an investment account instead of a savings account. Many mutual funds have very low minimum automatic investment amounts, and you often don't have to meet the minimum opening deposit when setting up automatic monthly transfers.

Donate the money to charity each month. It's almost like getting a double tax cut, because if you itemize, you'll be able to deduct the donation on your 2009 return.

So what will I be doing? Alas, our accountant says we need to increase our withholding for 2009, so for us, it will be as if the tax cut never happened.


Clean ClutterFree Simple said...

This latest tax cut does nothing for those of us who are self-employed. Sure, it might show up when we do our taxes, but on a day-to-day basis, it's not helping.

Corrie at "Cents"able Momma said...

You also need to be careful if you are a 2-income family (like you are). The total credit is only $800 for couples filing married filing jointly, but your employer does not coordinate with your spouse's employer to make sure the total cut from both your paychecks equals about the $60/month that it should be.

Also, there are income limitations that employers may not take into account with dual income families. The credit starts to phase out at $150,000 for MFJ and is fully-phased out at $190,000 for MFJ.

So, some dual income families may actually have a higher tax due next year due to not enough withheld from their paychecks.

Just something to think about :-).