Higher payroll taxes enacted at the beginning of the year are hurting taxpayers enough that the majority will be using any refunds they receive this year for day-to-day expenses.
Any spent tax refunds — for those of us lucky enough to receive one — will be going to day-to-day expenses this year according to a survey by the American Institute of CPAs (AICPA).
As a result of the payroll tax cut expiring in January, taxpayers are taking home smaller paychecks. Now, those taxpayers who expect to receive (or already received one) plan to either save that money or use it on expenses like food, gas or housing.
“Last year the IRS sent checks totaling nearly $310 billion to taxpayers, underscoring the significance of tax time to American households,” Ernie Almonte, CPA, CGMA, chair of the AICPA’s National CPA Financial Literacy Commission, said in a statement. “This year, in the wake of a paycheck squeeze, many Americans are counting on those refunds for relief — a way to bolster savings or shore up budgets. It’s critical that they have a well thought out plan for using the funds to maximize the benefit to their financial well-being.”
According to the AICPA, of those who expect to receive a refund, 43% consider the money more important to their financial well-being this year than in the past. The expiration of the payroll tax cut effectively reduced take-home pay by 2% for most workers as Social Security withholding reverted to 6.2% from 4.2%.
Roughly 70% of workers have felt least some impact in the paycheck reduction, according to the survey results. Nearly all of those who have made some adjustment including:
• 70% put less in emergency funds
• 51% cut back on cable and digital entertainment
• 45% contribute less to retirement accounts
• 17% are skipping payments on credit cards, utilities, rent or mortgages
Since the refunds taxpayers are receiving are so much more important to their finances this year, the National CPA Financial Literacy Commission offered tips:
First, pay the basics, like health care, food and shelter; then put money into an emergency fund; and if there’s extra money use it to pay debt.
Make a split
Instead of putting all of your refund toward the balance on your credit card, split the money between your credit card debt and your emergency fund. It’s imperative that you have cash on hand for any unexpected expenses.
Tackle high interest
If you have multiple sources of debt, pay whatever has the highest interest rate first.
Look long term
It’s tempting to use your refund on a big splurge, but if you still have money after doing the above, then consider making an extra mortgage payment or contribute to a retirement account. Both actions will benefit your future and help you get closer to being financially dependent.