The Financial Pothole: Temporary Tax Cuts

taxes

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

In the opening days of 2013 congress pushed through legislation to avoid the so called “fiscal cliff” preventing the taxes of the vast majority of Americans from going up, and automatic massive spending cuts  from kicking in. The news wasn’t all good, however, as the payroll tax decrease was not extended.

This means everyone’s paychecks would be reduced by 2% effective immediately.

This is a double whammy for me, as it most likely is with many people, since the first of the year is also when the new rates for my medical insurance kicks in. I received my first pay statement of the year over the weekend, and my bi-monthly take home pay has been reduced by $104.08. $20 of that is due to medical insurance premium increases, and $84.08 is due to the payroll tax increase. The failure of the government to extend the payroll tax reduction will be taking 168.16 per month out of my pocket, or a total of 2017.92 for the year based on a tax calculator.

The reduction was never meant to be permanent, therefore we shouldn’t be surprised that it has been repealed. I’m not surprised, but that doesn’t mean that it doesn’t make a 2% take home pay reduction any less painful for my family’s budget.

Yes, it is a pay cut. Describe it anyway you want, I have 2% less money now in my paycheck than I did last month.

I’ve heard the statement that since the cut was temporary, families shouldn’t have relied on the money and taken that opportunity to save the extra funds. The temporary tax cut was put into effect to help struggling families by putting extra money into their pockets.

If you were in a position to take that extra 2% and put it into savings, then you were not who our legislature had in mind when they put the tax cut into effect.

The timing of the repeal of this tax cut is inexplicable from the perspective of financially struggling families.  Unemployment is still high, and I recently read an article that described the economic growth of USA as “controlled recession.”

The same families that were struggling when the tax cut was enacted are still struggling now.

Complain as I may about the increase of the payroll tax back to 6.2%, it’s a reality and my family has to determine how to deal with it. The increase in medical premiums and taxes average out to about $50 less in our weekly budget. We plan to break it down like this:

  • Groceries : reduce by $15
  • Entertainment : reduce by $15
  • Savings : reduce by $20

Thanks to the actions of congress we didn’t fall off the fiscal cliff, and he non-renewal of the payroll tax reduction will affect some people more than others. For my family it’s certainly not a cliff, but more of a financial pothole.

But even potholes can pop a tire or bend an axle, and prevent you from getting to where you want to go.

How has the payroll tax increase affected you? Do you think the government should have extended it until our economy is healthier?

About Travis

26 Responses to “The Financial Pothole: Temporary Tax Cuts”

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  1. I knew it was going to happen so at least I was prepared. I will take some of the fluff out of my budget to compensate. At least we aren’t stealing from social security any more.

    • Travis says:

      I think they should have re-instated the 6.2 payroll tax, but found another way to cut taxes so the net result for Americans was a wash. Raising taxes (and decreasing paychecks) when the economy is still in the tank. Not cool Government…..not cool.

  2. Since I knew it was temporary, I did take the time to just push it into savings. I realize that many rely on the extra 2%, but all I can say is that it was temporary and we have to make sure we lookout for our own financial well being. We could no longer steal from SS to fund this break. If we waited until the economy was in a better place, then we don’t know how the Social Security system would have fared. I think they needed to let it end, but I completely understand that it will hurt many.

    • Travis says:

      I agree that we need to keep Social Security whole. But as I mentioned above, I think congress should have tried to find another way to keep the tax level the way it was for Americans. I’m just sayin’, if I were a betting man I would think there are some very expensive programs that we just shouldn’t be spending our money on right now….

  3. Like Lance, I knew it was going to happen and was prepared. We’ll adjust our budget somewhat, but not a whole lot as we really were not living on most of it. I know that many families benefitted from it and will impact as such. However, I do not think that it should’ve been extended as we simply have to increase revenue for the country. Actually, we need to do that and cut spending. Unfortunately, it looks as if they only truly care about the first part and not the second.

    • Travis says:

      It’s definitely budget cutting time, and I agree that there doesn’t seem to be as much interest in doing that. Lots of fat out there to cut…..maybe it’s time we stop being the world police until we get our own house in order!

  4. Chad says:

    I could be wrong, but weren’t the Bush tax cuts “temporary” as well? In reality, aren’t all tax percentages “temporary” since the government could always vote to have them changed? I think it’s bogus how the politicians try to make us think they are fighting for us in regards to taxes, but then they allow a 2% tax increase on everyone who works. The “temporary” argument is just a smokescreen. My taxes went up 2%. Just like you said Travis, no matter how one describes it, it is a 2% paycut.

    • Travis says:

      You are correct, Chad, they were temporary as well. The stupidest thing from my perspective is how they said they fought SOOO hard, and got this deal in place that helped so many Americans – and then in the fine print it says “oh, by the way, the payroll tax wasn’t renewed so get ready for less money in your paychecks.” But BOY did we work hard AFTER we got back from our Christmas break! Oh, and by the way, we have another big fiscal fight that will come due at the end of February, but we’re not going to talk about it now….we’re going to wait until the end of February when it becomes a crisis again. FIRE THEM ALL!

  5. debtgirl says:

    Yes, but even if it is a cut it was actually only supposed to be temporary so we really should have just pocketed, paid down debt (If I was smart, which I am not), and said thank you and when it was taken away, oh well!

    It was not supposed ot be forever, they should never have done it.

    • Travis says:

      that’s the tough part, though, debt girl. The tax decrease was to put more money into the pockets of struggling people – so what it did was give more income to families that needed it to help make ends meet. Now they’ve taken it away, again making those same people struggle again.

      They could have done what they had done in the past and make it a “one time rebate check.” But when people get large checks they typically use it to buy big ticket items like TVs and such – which may help stimulate the economy if everyone does it, but doesn’t do much for the day to day lives of people.

      I agree though, they should have either found a way to make it permanent….OR at least extend it to when the economy was healthier. Of course there’s never a good time to raise taxes on people. 🙂

  6. Jane Savers says:

    Here in Canada our payroll tax deductions went up slightly in 2 categories – employment insurance and Canada Pension Plan for people making over $44, 000 per year. The amount that is deducted for federal tax did not increase.

    25% of my pay cheque is taken in deductions but Canada has free health care and I don’t have to pay extra for that. I can get some of my federal income taxes back from my tax return if I invest in a RRSP (registered retirement savings plan). The government is desperate for us to save for our own retirements so they give generous tax credits for retirement savings and I will probably recieve $2,200 in the form of a tax refund because of what I invested in my own retirement.

    • Travis says:

      I wish our government would take a closer look at how health care is done in Canada. It just seems to me that health care is one of those basic needs that everyone should have access to (like roads, and education, etc). It’s also nice that your government is very supportive of you saving for your own retirement – but I don’t think you have Social Security (or an equivalent either). Maybe I’m wrong. Thanks for sharing how things are shaping up in our friendly neighbor to the north, Jane!

      • Jane Savers says:

        Everyone in Canada gets an old age pension. We have 3 different programs. 1) Canada Pension Plan is based on how much you paid in to it while working (deductions are taken from every Canadian on every pay cheque -no one is exempt). 2) The Old Age Pension -it has some other name but that is what everyone calls it. Everyone 65 and up gets a monthly cheque from the government. 3) Guaranteed Income Supplement – lowish income seniors get an extra cheque every month.

        I may be taxed at a 25% rate but I get a lot for it.

        • Travis says:

          Oh, it does sound like you have an equivalent to our Social Security. But many of us have a tax rate of higher than 25%. Well, that’s pre-deductions anyway….don’t get me started on how we need to simplify our tax code. 🙂

  7. k says:

    I’ve been checking all of my usual personal finance blogs today and I am shocked that this is the only one I’ve seen thus far address this. I think there is going to be a lot more grumbling going around when people realize how much this is actually going to add up during the year.

    In our situation, the money we are going to be out could easily pay for:
    -Nearly 1/3 of our total yearly mortgage expense
    OR
    -1/2 of our food budget
    OR
    -our entire house and car insurance premiums

    That’s huge and anyone who says otherwise is sipping the Kool Aid.

    • Travis says:

      I’m a little surprised myself, K – there have been lots of posts on the financial cliff and informing people that the payroll tax was not extended….but not many spelling out exactly how it affects individual people. Here’s one from Lance over at Money, Life, and More who also posted a comment to this article as well (above):

      http://www.moneylifeandmore.com/what-did-i-do-with-my-raise-in-2013-2858/

      Check it out….his raise in addition to the tax changes resulted in a net pay *decrease!*

      • Duncan says:

        I suffered the same fate. Our company reinstated merit increases after a multi-year freeze. My take home pay is lower, after the raise, because of the payroll tax increase and the health insurance premium increase.

        • Travis says:

          Booooo for lower take home pay. The good news for me is that we make our last payment on our car in April, so that will more than offset the rise in payroll tax + medical premium increase.

  8. Cassi says:

    I could honestly rant and rave for hours about congress. My government class recently read over the old budgets and formulated our own in groups, and we got down to business and my groups budget won. If they would start representing the people and not protecting themselves, things would be a whole lot better.

    • Travis says:

      So , true Cassi – when the whole “financial cliff” thing was going on there were articles (maybe you read them too) saying that Congress wanted everything to expire, THEN strike a deal so that they could claim they negotiated a tax cut for Americans. That kind of word play is just one example of what is wrong with our elected officials……..I wonder just how dumb they think we are?

  9. It was more of an annoyance/necessary evil for me, which I realize is a great position to be in. I like how you immediately set forth on cutting back to compensate–I did the same and it’s working well.

  10. Greg says:

    In my opinion, the temporary cut in Social Security taxes (AND the Bush tax cuts) were
    simply vote buying schemes by the party in power…..anybody who isn’t blind should have
    just put the windfall in the bank.

    • With all due respect, Greg, what would you say to someone who was right on the edge of being able to pay their bills, then the 2% tax cut comes along. Now they are able to pay all their bills on time, and they are able to make ends meet.

      These are the people that the government had in mind when they enacted the tax cuts.

      Would you suggest to these people that they should just not pay their bills, and instead put the “windfall” into their savings account?

  11. scott says:

    i enjoyed this blog very much thanks scott

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