February 16, 2018

Q.  My husband and I are anticipating an increase in our paychecks because of the tax cut. We are trying to decide on the best use of this extra money. Improving our financial health is one of our New Year’s resolution. We would also like to invest in some fun and relaxation for the whole family. Any suggestions on where to start?

A. The Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018. In comparison to previous tax brackets and tax rates, the new rates due to TCJA are slightly lower and the brackets are generally slightly broader.

Individual income tax rates

Pre-existing law. There were seven regular income tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

New law. There are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These provisions sunset and revert to pre-existing law after 2025.

Under the 2017 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 25% tax bracket and would have a tax liability of $5,739.

Under the 2018 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 22% tax bracket and would have a tax liability of $4,740.

Tax cuts are not equally applied. Therefore, depending on your income bracket, you may or may not see an increase in your take-home pay. It would be a good idea to wait until you receive your February paychecks to see if your take-home pay actually increases.

According to the National Endowment for Financial Education (NEFE), 69% of U.S. adults set a New Year’s financial resolution. At the same time, two thirds (63%) of Americans experienced an unexpected expense in 2017. Financial setbacks add to distress and can keep us from accomplishing our resolutions or reaching our goals.

The first step in improving your financial health is to have an emergency savings. An emergency savings will help you weather any unexpected expenses that occur. Having an emergency savings keeps you from going further into debt when the unexpected happens. Saving any increase in take-home pay is a painless way to increase your savings.

Once you have an emergency savings, paying down debt is a good step to take to improve your financial health. Setting a goal to reduce your debt by 5% to 10% is a way to make progress. Paying down debt also has a positive effect on your credit score. The higher your credit score, the less interest you will pay when you borrow money. This means you save even more money.

Having both an emergency savings and paying down debt will bring you closer to achieving your New Year’s resolution. Spending money for fun and relaxation is not investing and will not bring you closer to your resolution of improving your financial health. However, with a little thought and preparation, you can still have some fun and relaxation.

Why not take steps to improve your financial health and also plan some low-cost family activities? Good luck with your Near Year’s resolution.


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