No one was more aware of the Social Security payroll tax cut for 2011 than I was. I do the payroll for two (very) small family businesses, so it was part of my job to know about it. I made the changes necessary to do the payrolls correctly, but I never made the leap from thinking like an employer to thinking like an employee.
That’s why I’m glad an article from Vanguard landed in my email inbox.
Vanguard reminds us that the 2% payroll tax cut for 2011 could mean up to $2136 extra in our paychecks this year, depending on our salaries. They suggest that it’s an easyway to find some extra income to invest and they’re right. And since we are less than a quarter of the way through the year, I decided it wasn’t too late to do something about it.
Giving the Tax Cut a Job
One thing that has worked very well for us is to capture different streams of income – no matter how small – and assign them jobs. For instance:
- My online earnings are assigned to paying for my daughter’s college expenses.
- Any extra or “found” money that comes in is snowflaked as extra payments on our debt.
Well here was a little stream of income – in the form of a tax cut – that I had let get swallowed up by the river of monthly expenses. So now it was time to put it to work.
We considered using our tax savings toward debt – and that wouldn’t have been a bad choice – but decided to use it for retirement savings instead. (Just like the people at Vanguard hoped we would.:-)) Since this tax cut means that we are paying less into Social Security, it made sense to direct it toward retirement savings. Even if Social Security isn’t around when we retire, this is a chance to recapture some of what we’re paying in and direct it toward on our own retirement efforts. And retirement savings come with a tax advantage as well.
How Big a Difference Can a One Year Tax Cut Make?
To get an idea of what this one year tax break could mean down the road, I crunched some numbers. Here’s what I found:
Scenario 1: If you’re someone making $40,000 your 2% Social Security tax cut is worth $800. If you invest that $800 and earn 6% you’ll have $2546 after 20 years or $4594 after 30 years.
Scenario 2: If you’re making $75,000, the amount of your tax cut for 2011 is $1500. Invest it and earn that same 6% and you’ll have $4810 after 20 years or $8615 after 30.
Scenario 3: If you’re earning $106,800 or more, you’re earning the maximum amount subject to Social Security tax, which means your tax break is worth $2136. Invest it at 6% and your investment will be worth $6850 after 20 years or $12,286 after 30.
These are very rough numbers. The 6% return is a random number I chose and the amounts I calculated don’t take into account the return you’ll earn over the year you’re initially investing. They also don’t take into account any tax benefits you may get from investing in a retirement plan.
But the message is clear: You can turn this small tax break now into something much bigger down the road.
Have you assigned your Social Security tax cut a job? Or did you forget about it like I did? Let me know in the comments below.
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I like how you assign "jobs" to income. Clever way to put it. Actually, I haven't seen the cut because the retirement rep who helped me adjust our 401K contribution (on line) way over did it and we are getting a humongous amount directed to our retirement savings. I decided to leave it for a few months and see if we could manage. So far so good!
Hi Julie! I just got the link to your blog from LinkedIn. I love it! This is my new source for personal finance tips. I've already learned a lot from the posts I've read. Hope all is well!!
Barb – It sounds like your cut is already well accounted for then. Kudos to you for trying to make it work.
Molly – How fun to see you here! Thanks for commenting. I hope some of these things are applicable for and ex pat.
As a recent graduate, I'm still unemployed!
But it would be nice to get this tax cut. Maybe I'll get some good news from the interview I just did…
LaTisha – Good luck!
LaTisha – Good luck!
Thanks! I literally got a job 4 days later!
Congrats!
It’s great that we are putting more money into our pockets by reducing our social security by 2%, but how does this help social security by reducing their funds? Is this a death wish for social security?
I can’t imagine that it helps Social Security at all, Larry. Just another example of our screwed up Social Security policy. In my humble opinion, of course.
Julie, is this Social Security tax cut of 2% just for 2011, or is it going to continue further on? I’m a litttle bit confused about this again because of the parodox : we say social security may go bust, and then we have everybody put in less? I do have a 401K and a small pension that is frozen from a previous employer buy out, so you can probably see my concern.
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Larry, just for 2011. And it’s just for the employee’s portion, not for the employer’s.
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