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What Should You Do With Your Social Security Tax Cut?

Congress’s passage last month of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, commonly known as the extension of the Bush tax cuts, will bring one big change for taxpayers: an extra 2 percent in your pocket from the reduction in the Social Security tax. The tax drops from 6.2 percent to 4.2 percent for all wages earned, up to $106,800.

social-security-payroll-tax-cut-401k-payoff-debtWhat Does That Mean For Me?
For someone who earns $50,000 a year, that 2 percent cut translates into an extra $1,000 in your wallet for the year. While it may be tempting to use that windfall to help pay for a Caribbean vacation or high-end LCD TV, a better choice is to use that money to focus on your finances.

Pay Down Your Debt
According to the Federal Reserve, Americans had more than $850 billion in revolving debt as of March 2010, with most of that tied up in credit cards. Given the propensity of Americans to pull out the plastic, and the fact that the average interest rate on a variable rate credit card tops 14 percent, it makes a lot of sense to spend that extra $1,000 paying down credit card debt, or other debt you might have. Having lower debt can help boost your credit score and result in lower interest rates on things like mortgages and auto loans.

Invest in your 401(k)
Many people have seen their retirement funds take a beating during the stock market’s roller coaster ride of recent years. For 2010 the Standard & Poor’s 500-stock index closed up almost 13 percent for the year, while the Dow Jones industrial average closed up 11 percent, and many experts expect the market to make even further gains in 2011. If you put that extra $1,000 into your 401(k) you could see an even bigger bonanza if your employer matches your contributions.

About the Writer
Susan Ladika has been a writer and editor for 25 years. Her freelance work has covered everything from business to travel to science to international issues, and have appeared in such publications as Science, Town & Country, HR Magazine, Developer, The Wall Street Journal-Europe, The San Francisco Chronicle, and many others. She has also done extensive editing as a newspaper and wire service editor holding positions such as the Tampa Tribune Bureau Chief.

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