The Tax Relief Act of 2010 provides for a one-year tax break for many employees. The Social Security taxes withheld from wages is reduced by 2 percent in 2011. This does not reduce the Social Security earnings base for future benefits.
This will give more take-home pay for employees. What might be done with the savings?
Of course it could be spent on daily living as prices go up. I expect inflation to come back when the unemployment and housing problems are solved - and they will be solved, but no one knows when. Right now you can see the impact of inflation on some prices - some boxes are smaller than they used to be, etc.
Perhaps the savings could be contributed to the payroll savings plan at work. That would keep the take-home pay about the same, but provide an investment that will provide more in retirement plan savings.
Or, the savings could be a contribution to a Roth IRA. Up to $ 5,000 ($6,000 if age 50 or older) could be contributed to a Roth IRA if the total income is less than the limits.
For a contribution to a Roth IRA, the phaseout starts at $169,000 for joint returns and $ 107,000 for single filers.
If the income limits in 2011 prevent a contribution to a Roth IRA, why not make a contribution to a non-deductible regular IRA now? Then plan to convert to a Roth IRA in some future year.
Unlike Roth IRAs, there are no income limits on contributions to traditional IRAs. However, the contributions may not be deductible if the employee is covered by a retirement plan at work and/or the applicable income limits are exceeded. In that case, the contribution can be done to a non-deductible regular IRA.
If you don't have wages (needed to do IRA contributions), maybe you know of a friend or relative that might consider investing the payroll tax savings in 2011. It might even start or continue a savings habit (a good thing to have). Living on less than you earn is better than spending more than you get!
Did you hear "You can't help getting older, but you don't have to get old" by George Burns?
• John Bullis is a certified public accountant, personal financial specialist and certified senior advisor serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.
