Two tax breaks to be thankful for
As thankful as we all are for public schools, Social Security, and the New York City subway system, the time comes once a year that we have to PAY for all that stuff. That time is tax season.
It’s hard to put too sunny a face on paying taxes, especially if you’re living paycheck to paycheck. But here are two pieces of good news you should know about—and that can help you get ahead in your savings.
1. A payroll tax break. Everyone who works loses a certain percentage of each paycheck to FICA, which stands for Federal Insurance Contributions Act. Those contributions go to Social Security and Medicare. This year, thanks to President Obama’s tax bill, the amount you pay goes down by 2 percentage points. So if you make $40,000, that’s like getting an $800-a-year raise, courtesy of the government. Since you don’t receive it in one lump sum, it might be hard to notice paycheck to paycheck. In fact, the government is hoping that’s the case, because it wants to boost the economy by getting people to spend their money—and if you don’t “feel” the extra money, you’re likelier to fritter it away. Don’t fall for it: Make a point to set up an automatic transfer to put the extra cash into savings.
2. The Saver’s Credit. If you and your spouse earn less than $55,500 combined, or if you’re single and you earn less than $27,750, you could be eligible for the Saver’s Credit, which used to be more clunkily called the Retirement Savings Contributions Credit. It allows you to get a credit for up to half of the amount of your contribution to a 401(k), IRA, or certain other retirement plans. (A tax credit is better than a deduction: It’s actual money deducted from your tax bill, rather than just deducted from the amount of your taxable income.) Don’t leave that tax credit on the table: Contribute the most you can to a retirement fund. It’s the best thing you can do for your future.
Now that you know about these opportunities, don’t squander them! Use them as an incentive to boost your savings this year. Your future retired self will thank you.
Have you noticed the increase in your paycheck this year thanks to the payroll tax cut?