In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) was signed into law creating a tax holiday of sorts for you in 2011! In short, it reduces the Social Security tax withholding rate from 6.2 to 4.2 percent, a payroll tax cut, which will increase the amount of take-home pay that you may receive! HOORRAY!! If you are a small business owner... the break is the same going from 12.4 to 10.4 percent.
Now the government is doing this in hopes that you and I simply spend it - like we always do. This, in theory, will help the economy by increasing the money supply. While you may think that a measly 2% increase in your take-home pay won't amount much…the economy sees us (consumers) as 70% contributors to our nation's Gross Domestic Product, and in that view, 2% is a lot!
Yet whose best interest is served by just spending it? When the law reverts back, I contend that you will look back and not even remember that you received a pay raise. So, I propose a better idea…save it! Why? Cause you already know how to live by your current means of income, so it is possible to take the increase that you may receive due to the payroll tax cut and invest it directly in your employer-sponsored plan. By contributing as much as you can to your plan now, you can benefit from compounding and higher future earnings. Also, by raising your contribution you'll also save more on your taxes, as your taxable income will go down.
If you haven't enrolled, then it’s a great reason to start, and if are already participating, then a great reason to raise your contribution. Then, you might be able to look back someday and say….I remember that tax cut…I saved it…and look at what a measly 2% is worth now!
Focus Financial Network, Inc.
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