What does the payroll tax cut mean for you and your bank account?Posted: Updated:
President Barack Obama on Friday signed a compromise tax bill that extends the Bush-era tax cuts and cuts the payroll tax by 2 percent. That means more money in the pockets of all Americans, something financial adviser Jacob Gold says is a good thing.
"I do feel consumers and businesses feel there is going to be some closure at least for the next two years, and they know they are going to be able to keep more of their money in their pocket for their own household," Gold said.
According to Gold, the new tax law does remove uncertainty -- nobody's taxes are going up and nobody's unemployment benefits are running out -- but it also goes further by cutting the payroll tax.
"By reducing the amount that people pay in payroll taxes, that allows individuals to keep the money in their own pocket so it puts the power in the hands of the people. The anticipation is that they will spend it enough that businesses will be able to get back on their feet and then address ongoing issues going forward," Gold explained. "In some ways that helps the overall economy, but I am of the standpoint, as well, that a stable consumer is also a predictable consumer."
Gold says that means spending might not be the answer.
"There are a lot of people who were saving three, four, five years ago, and because they lost their job, because their salary went down, because their home values went down, they felt they could no longer save," he said. "This could be the opportunity for them to say, 'OK, for the first time in a couple of years I am going to be able to help my own personal balance sheet and put this money to work.'"
Gold suggests using an online calculator to figure out your tax savings per paycheck.
"Take that amount and have that directly deposited into [your] savings account or [your] checking account," he advised. "Have that money be allocated to something to be utilized for the future. I don't want [you] to take that money and go to Best Buy and buy a new iPod."
Because the amount in each paycheck won't be huge, Gold says it could be easy to simply spend the savings and have nothing to show for it a year from now.
Unfortunately, it can seem like that is what the government is doing. The tax law is expected to add over $800 billion to the deficit.
"Historically, nothing has been able to pay down our deficit better than an economic expansion," Gold said. "So, the federal government is looking at this as being the catalyst for economic expansion."
Gold believes only time will tell if that plays out as hoped. He said the best thing consumers can do is worry less about that, and more about themselves.
"[If] everyone takes care of themselves and their own financial situations, exponentially that will help the whole nation," he said.
As for the return of the estate tax, Gold said that while it will affect very few people, everyone should have a will and do some basic estate planning.
Gold has just released a new book called "Real Financial Intelligence." It is available at Borders and on Amazon.com.
If you would like to calculate your savings with the payroll cut, visit www.MyTaxBurden.org.