Tax reform to increase take-home pay: What to do with the extra money

Nick Lambrow
Guest Columnist

Beginning this month, paychecks will get a little bigger. With the new tax law, the IRS has issued new withholding tables, which employers should implement by Feb. 15.

That means more take-home pay for most workers. Exactly how much will depend on variables such as income, pay-period length and filing status. Still, the U.S. Treasury Department estimates 90 percent of wage earners will see increased take-home pay.

For example, a single taxpayer who earns $50,000, claims two withholding allowances and is paid biweekly could see her paycheck go up by around $49. Or, a married couple with a combined income of $100,000, who file jointly and take four withholding exemptions, could see thier biweekly take-home pay grow by about $80.

With this windfall comes the big question: What should you do with the extra cash?

Invest in retirement

Let’s assume that single taxpayer mentioned above is 35 years old. If she were to take just $49 per paycheck and add it to a retirement savings account with a 6 percent interest rate, she would have about an additional $100,000 when she retires at 65. With Social Security under continuing scrutiny, having one’s own nest egg in good shape is more important than ever.

Start an emergency fund

A 2017 Federal Reserve report found 44 percent of Americans could not cover an unexpected $400 emergency expense. If you’re among that 44 percent, try to put at least half of your boost in take-home pay into a savings fund that you promise yourself not to touch. Unfortunately, Americans’ savings habits are trending in the wrong direction with the U.S. Personal Savings Rate having decreased from 11 percent in Dec. 2012 to just in 2.4 percent at the end of 2017.

Cover college costs

Higher education has become vital to securing good-paying jobs. But, college costs keep rising. Give your kids a head start by opening a 529 College Savings Plan, or if you’re still paying down student debt, increase your monthly loan payments.

Spend wisely

Careful purchases can help you save money, grow your wealth or support your community. Consider setting aside your additional pay for home improvements or a down-payment on a fuel-efficient car, donate to charity, or spend more at local small businesses. Most charitable donations are tax deductible, providing additional incentive to support not-for-profit organizations.

But don’t forget”¦

In February, the IRS will launch its online withholding calculator. Be sure to use it so you don’t end up with a big tax bill at the end of the year. Also, if you’ve had a major life event (marriage, new baby, etc.), you’ll want to review your W-4 to ensure it’s up to date. And finally, if you pay more than $10,000 in state and local real estate taxes, remember that you have a new deductibility limit.

It may be advisable to consult with a financial professional to examine your current situation, define your goals and design a plan to help you secure your financial future. Tax laws come and go (the new reforms sunset after 2025) but your own personal financial plan should be stable and consistent, ensuring the best possible future for you and your family.

Nick Lambrow is the President of M&T Bank’s Delaware Region.