What Did You Spend Your Payroll Tax Cut On?

fiscal cliff payroll tax cuts lump sum

With the recent deal to avert the fiscal cliff for taxes, there was one tax cut that wasn’t spared that will affect millions of Americans, the payroll tax deduction.

In an effort to boost the economy, lawmakers cut the payroll tax on Americans during 2011-2012  by 2 percentage points from 6.2% to 4.2%. This cut meant that the average worker brought home an extra $1,000 per year in take-home pay, or $42 every other week.

Unlike other tax breaks however, where you receive the benefit in one lump sum, this break was spread out throughout the year. Did this method of distribution make it easier or more difficult for the average worker to use the increased revenue to their best advantage?

CNN just released a report showing that workers in fact used the extra $1000 much differently than they had planned.

Consumers spent an average of 36% of the tax cut, though they said they only intended to spend 13.7%, a Federal Reserve Bank of New York report found. That’s more than economic theory would suggest and on the higher end of what was spent in previous tax rebates in recent years.

…It affected nearly 155 million workers, who saw a total increase of $112 billion in their 2011 paychecks. The provision was not renewed in the fiscal cliff deal.

Workers were most likely to use the tax cut to pay down debt … but not as much as they originally said they would. Some 40% of the money was used to pay off obligations, though consumers wanted to reserve 53% of the funds for that purpose.

The remaining 24% was set aside for savings, though workers had intended to save 33.3% of their extra income.

Read the full report here.

With the new fiscal cliff deal killing this bonus for millions the effects on the economy do not look encouraging. While it is sure to hurt at each and every household to take a $1000 reduction in take-home pay, even worse is the $112 billion that has been sucked out of the economy in general.

Now that your take-home pay is a grand lighter, how do you plan to make up the difference? Leave your comment below.

Image By: Tax Credits

About Anthony Candella

Anthony is the founder and Directing Attorney of YourCreditAttorney.com and has been helping consumers just like you understand and improve your credit and financial situation since 2003.