Much of the $240 billion payroll tax holiday will be spent on lattes, but discipline can turn yours into real money. Image: CC i need coffee/coffee hero/Flickr

The payroll tax holiday gives everyone earning a paycheck a 2 percent raise in 2011. The government enacted the payroll tax holiday as an economic stimulus and hopes you will spend it. But there are better ways to use the payroll tax holiday to stimulate your own economy in the next two years.

Happy payroll tax holiday!

To figure out how to use your payroll tax holiday, calculate how much the tax break will add to your disposable income. Until Jan. 1, you’ve been paying 6.2 percent of your wages to Social Security. For the next two years you will only pay 4.2 percent. Two percent doesn’t seem like much, but it adds up to $120 billion a year the government won’t be spending on weapons, Fannie and Freddie or ethanol subsidies. The Obama administration is counting on you to spend your fair share instead, on everyday essentials like lattes, smartphone apps and cigarettes.

How much is your payroll tax holiday worth?

The payroll tax holiday is designed so that a little extra money trickles in every pay period. The money shows up in such indiscernible amounts that most people won’t notice as it’s spent. But over the course of a year, the nickels and dimes add up to dollars. For example, two percent of $40,000 a year is $800. The best way to corral that bonus is electronically. The simple strategy is to divert 2 percent of your paycheck to an additional savings account set aside for the payroll tax holiday. Then use it to reward yourself for your discipline by paying cash for something you always wanted.

Maximizing your payroll tax holiday

Paying down debt is the absolute best way to use your payroll tax holiday. Your credit cards probably carry 15-to-20 percent interest. Saving money on credit card interest adds more to the value of your 2 percent raise long after the payroll tax holiday is history. If you make an automatic electronic payment, increase the monthly amount by 2 percent of your paycheck. You take home the same amount you did before, and your debt is reduced faster. If you have a 401K, boost your contribution by 2 percent. In two years you’ll have $1,600 extra. If your employer matches, $3,200. In 20 years at 6 percent a year you get $10,593. Now that’s a tax break.

Sources

New York Times

Consumerism Commentary

Americans may no longer be entitled to a mortgage tax deduction if the deficit commission gets its way on the tax break. Image: CC erion.shehaj/Flickr

The mortgage interest deduction is a tax break Americans hold sacred. But the mortgage interest deduction takes a big bite out of federal tax revenue. The Obama administration’s deficit reduction commission has put it on the table, causing an uproar from homeowners and Realtors.

Mortgage interest deduction a big target

The mortgage interest deduction is regarded as an inalienable right in the U.S. Until the deficit commission came along, the tax break was considered politically invulnerable. But for a presidential panel looking to cut $4 trillion in deficit spending over 10 years, the $100 billion cost of the mortgage interest deduction in terms of lost federal tax revenue is an obvious target. The National Association of Realtors, which has courted Congress with nearly $38 million in campaign donations over the last 20 years, wants the deficit commission to leave the mortgage interest deduction as is.

Moment of truth for tax break

The mortgage interest deduction may survive deficit reduction, but not unscathed. Under the current mortgage interest deduction, up to $1.1 million in debt for a primary and second home qualifies for the tax break. In the deficit commission report titled “Moment of Truth” submitted to lawmakers Dec. 1, only $500,000 of debt from a primary residence would qualify for the mortgage interest deduction. Plus, the tax break would be converted from a deduction to a 12 percent credit against interest, corresponding with the lowest of three proposed income tax rate reductions to 12 percent, 22 percent and 28 percent.

Economists say tax break is overrated

The National Association of Realtors has said tampering with the mortgage interest deduction will delay any recovery in the housing market and plunge the country into a double-dip recession. However, economists say the tax break ends up making lower-income households subsidize people with expensive homes. In fact, according to Congress’ Joint Committee on Taxation, of $104 billion the mortgage interest deduction is estimated to save taxpayers for 2010, about one-third of that tax break goes to 11 percent of taxpayers making at least $200,000 a year. Economists also say the mortgage interest deduction artificially inflates home prices — which is what Realtors like to see.

Sources

Dallas Morning News

Forbes

Las Vegas Review Journal