The recently-passed bipartisan tax bill gave a majority of Americans a tax break. How, though, should you spend that money to make the most of your federal tax break? According to experts, consumers should think before they spend as that added bonus could add up in the long-term.
The tax bill that President Obama signed into law this month gave a large number of Americans a yearlong discount on their payroll taxes in 2011, reducing the 6.2 percent tax rate on Social Security to 4.2 percent. Those self-employed business owners will also benefit from the tax cuts, paying 10.4 percent in payroll taxes instead of the normal 12.4 percent.
While the government hopes that the $120 billion in payroll tax breaks will be spent, there are other ways to utilize that money. First, estimate what you stand to make from the tax breaks using tools like the calculator Kiplinger's put up on its Web site this week that will help you sort through the red tape. If you have accumulated debt, it is best to use that money and apply it to your loan balance. Moreover, if you're determined to reward yourself for your economic prudence during the recession, consider saving enough money so you can purchase that iPad or new laptop in full without utilizing a line of credit.
For those who think in the long-term, it is a very wise decision to start a 401K or simply invest in another tax-privileged retirement account: This is a fitting decision as the tax break is siphoned from your Social Security payments in the first place.
Whatever you decide to do with the money, bear in mind that the tax cuts are not permanent and that your paycheck will go back to its normal levels after the tax cuts expire.