Proposed Payroll Tax Cut

[newAndImproving]

What changes to Roth vs 401k contributions should I consider making if the current payroll tax cut idea becomes a reality?

If my payroll taxes go to zero, it would make sense contribute to post-tax retirement accounts only because it would end up being the same amount in, with better tax treatment out.

What is confusing me is that it would be a mid-year tax cut, so using the basic example below, my tax rate would effectively be the same for the whole year, but that might not be how the taxes are applied.

Would the outcome be that income for the first 6 months is taxed at 20% and then the second 6 months are taxed at 0% (even if my apparent income is higher), so it makes sense to shift your contributions for the second half? Can I then move around contributions retroactively from the first half to reduce my tax load during that time, knowing that my post-tax accounts will meet my goals for the year from higher contributions during the second half?

Tldr: mid-tax year tax changes confuse me

Example
Six months: 20% tax
Six months: 0% tax
Result: 12 months: 10% tax ??

 

[cathy63]

If there's a payroll tax cut, it would only affect the 7.65% that you pay for SS and Medicare (15.3% if you're self employed). It would not cut your federal income tax. I don't think there's any reason to change your retirement contributions based on a reduction in SS and Medicare taxes.

 

[newAndImproving]

Thanks Cathy63.

That makes it much easier.

 

[Jerry1]

If there's a payroll tax cut, it would only affect the 7.65% that you pay for SS and Medicare (15.3% if you're self employed). It would not cut your federal income tax. I don't think there's any reason to change your retirement contributions based on a reduction in SS and Medicare taxes.

Maybe no income tax reason, but I would, assuming I didn't need the money, throw all of a payroll tax cut into a retirement fund. Be it a tax deferred account or a ROTH, I'd still take the cut as an opportunity to increase my retirement savings.

 

[Sunset]

Of course it will hasten the shortfall in SS and Medicare.

 

[MissMolly]

Yeah, I don't understand why they would cut taxes on programs that are already struggling. I guess I am just not smart enough to see the wisdom in this

 

[Gumby]

Yeah, I don't understand why they would cut taxes on programs that are already struggling. I guess I am just not smart enough to see the wisdom in this

Presumably to put more cash in people's hands immediately, so they can spend it and stimulate the economy. I recall a temporary payroll tax holiday in the wake of the Great Recession of 2008-09 for the same reason.

 

[ShokWaveRider]

Not much good for those of us that do not work.

 

[Gumby]

Not much good for those of us that do not work.

I never sweat another guy's good deal. Life is (mostly) not a zero sum game.

 

[Spock]

Of course it will hasten the shortfall in SS and Medicare.

Just press "print".

 

[Dtail]

Yeah, I don't understand why they would cut taxes on programs that are already struggling. I guess I am just not smart enough to see the wisdom in this

There is no planning or caring for what happens in the future, just the next 6 months. Simple as that.

 

[razztazz]

Of course it will hasten the shortfall in SS and Medicare.

That's probably the reason somebody thought of it.

 

[Aerides]

It's unlikely this one will make it very far, but even if it does, it's been done before (2009-11 ish?) under the idea that it does put more money in consumer's hands. Some of which they may spend. So perhaps it fits under the definition of a stimulus, if not emergency relief.

 

[MissMolly]

Presumably to put more cash in people's hands immediately, so they can spend it and stimulate the economy. I recall a temporary payroll tax holiday in the wake of the Great Recession of 2008-09 for the same reason.

Well, I understand that part, but I don't understand choosing two severely underfunded programs to use for this. And due to the lack of employment over the past couple of months, there will be an even greater shortfall in these two programs. I would have thought there would have been a better place to cut taxes or find the needed funding without using Medicare and SS funds.

 

[Sunset]

It's unlikely this one will make it very far, but even if it does, it's been done before (2009-11 ish?) under the idea that it does put more money in consumer's hands. Some of which they may spend. So perhaps it fits under the definition of a stimulus, if not emergency relief.

Yes, and I thought it was not a good thing back then either..

Much better would be to send $$ to people, without defunding 2 critical programs that most folks will have some dependence upon.

 

[Gumby]

Well, I understand that part, but I don't understand choosing two severely underfunded programs to use for this. And due to the lack of employment over the past couple of months, there will be an even greater shortfall in these two programs. I would have thought there would have been a better place to cut taxes or find the needed funding without using Medicare and SS funds.

I think mainly because this is the quickest and easiest way to get the money to people who will spend it. Employers just stop taking that chunk out of paychecks.

 

[N02L84ER]

Also, those payroll taxes are the biggest taxes for the lower income people.

 

[Beststash]

If Congress is smart this will never happen. SS and Medicare are not expendable and this is based more on ideology than economic justification.

 

[RetiredAt55.5]

Also, those payroll taxes are the biggest taxes for the lower income people.

And, this tax break also benefits the most higher income people (up to the income limit).

 

[target2019]

Someone said, "A payroll tax cut only helps if you're on the payroll."

What will it take to persuade Congress to go along?

 

[ceciledian]

I never sweat another guy's good deal. Life is (mostly) not a zero sum game.

While I agree with your sentiment a payroll tax cut doesn’t help the unemployed either.

 

[samm]

There is no planning or caring for what happens in the future, just the next 6 months. Simple as that.

+1

Any payroll tax cut will hasten the end of current social security and medicare plans.

Totally crazy if you support these programs.