If you’re receiving a raise or a bonus this year, you may feel a little bit wealthier when you see your suddenly inflated bank account or paycheck. But it’s no secret that this money can disappear quickly.
Resolve to take extra care with your bonus or raise this year and make sure to get the most of it. This requires you to think beyond the new flat screen TV or summer vacation, and consider how the extra money could help you in the long run.
The extra tax hit
A boost in your wages this year won’t mean quite as much as it did in the past due to the rise in payroll taxes. Any raise or bonus you receive is subject to payroll taxes, which increased for all wage earners and those who are self-employed in 2013. The employee’s share of the Social Security payroll tax has reverted to 6.2 percent for 2013 after being reduced to 4.2 percent in the two previous years. That means you’ll have $20 less in take home pay for every $1,000 you earn. The tax applies to the first $113,700 of income earned in 2013. In short, this tax increase may counteract a boost to your paycheck to some extent, depending on your circumstance.
For those at higher income levels, additional taxes may be incurred:
- The addition Medicare surtax of 0.9 percent. This applies to wage or self-employment income over $200,000 for single tax filers and above $250,000 for married couples filing a joint return.
- A higher federal income tax rate of 39.6 percent applies for taxable incomes above $400,000 for single taxpayers and above $450,000 for married couples filing jointly. This is higher than the 35 percent rate that applied in prior years.
Virtually all wage earners will feel the extra tax hit in 2013.
Maximizing the impact
Once you’ve calculated the “take-home” value of your bonus or raise, it comes down to a matter of spending the money now, paying down existing debt, saving and investing it, or a combination of the three.
After receiving a bonus check, it’s often tempting to make a purchase of something that’s long been on your wish list. Before you do, think about whether that money could have more impact in other ways.
If you have significant debts, particularly high interest credit cards or other loans, you may want to use some of the extra cash to pay down those loans and dramatically reduce future interest costs. The faster you can eliminate debt, the more money you will have left from your paycheck for other purposes.
Alternatively, you can apply some of the extra money to help achieve your key financial goals. These can include:
• Having sufficient emergency cash reserves in place (you should have enough to cover at least three to six months of expenses).
• Investing more money for long-term goals like retirement or your childrens’ education
• Increasing the level of insurance coverage you have in place to prepare for the unexpected, such as death, disability or medical needs.
Getting more from your raise
If you’ve received your annual salary increase, the change to your bottom line is more gradual, but it also means you can take steps to steadily improve your long-term financial outlook. You could consider:
• boosting pre-tax deferrals into your workplace retirement savings plan;
• devoting a portion of the increase to other retirement savings, such as an IRA; or
• directing more money to other investment accounts, such as a 529 college savings plan
Every dollar invested this year has the opportunity to grow as time passes. That is a powerful way to multiply the impact of this year’s pay hike.
Gregory Younger, CRPC is a Financial Advisor with Ameriprise Financial Services, Inc. in St. Peters, Missouri. He specializes in fee-based financial planning and asset management strategies and has been in practice for 12 years. To contact him, http://www.ameripriseadvisors.com/gregory.d.younger/ or 300 First Executive Avenue, Ste. D, St. Peters, MO 63376; (w) 636-405-5004, (c) 636-233-2099.
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