For the country as a whole, and many of us, these are trying times. But in 2011, Uncle Sam is throwing us a bone -- in the form of a "Social Security tax holiday."
How it works
If this is news to you, you're not alone. The National Foundation for Credit Counseling discovered that 46% of survey respondents weren't aware of this welcome tax break at all.
You may or may not realize that the "FICA" sums subtracted from your paycheck represent your contribution toward Social Security. The first $106,800 you earn gets a 6.2% haircut, but your employer also kicks in 6.2%, for a total of 12.4%.
In 2011, your employer will still fork over 6.2% of your earnings to the government -- but you'll only pay 4.2%. While a difference of two percentage points might seem small, it's actually kind of a big deal. If your earnings are $50,000, instead of paying $3,100, you'll pay $2,100, saving $1,000!
That sum won't arrive in a single big check, though. Instead, it will simply plump up your paycheck a little bit each pay period. The difference might be easy to miss, but savvy Fools will plan ahead and capitalize on this temporary advantage.
Spend it wisely
Sure, you could let the savings accumulate and splurge on a new large-screen TV. (Uncle Sam hopes you'll do exactly that -- frankly, the economy could use the help.) But other alternatives may leave you with bigger payoffs in the long run.
Remember, 67% of Americans have saved less than $50,000 for retirement. Even a nest egg 10 times that size won't last long in retirement for anyone accustomed to even a reasonably comfortable living. Thankfully, the tax holiday offers you several different strategies to improve your financial standing:
- Pay down your debt. If you're saddled with high-interest credit card debt, you need to pay it off as soon as possible. At an all-too-plausible 20% interest rate, retiring $1,000 in debt will save you $200 in interest alone. In short, eliminating your debt would give you a 20% return on your money -- a result you'll be hard pressed to find anywhere else.
- Bolster your emergency fund. You should set aside somewhere between three and six months' worth of income just in case you lose your job, suffer a medical emergency, or experience some other financial disaster. Avoid volatile havens such as the stock market, where your holdings might suddenly plummet right when you most need them. Instead, consider lower-risk options such as money-market funds or short-term CDs.
- Invest for your retirement. If you sock away $1,000 ,and if it grows at 8% over the next 25 years, it will become nearly $7,000 -- not bad for a one-year increase in your earnings. Dividend-paying stocks can be a particularly smart move, since they'll keep paying you longafter the 2011 tax holiday becomes a fuzzy memory.
- Fund your IRA or 401(k). If you up your contributions this year with help from the FICA tax break, you'll likely be able to maintain the higher level next year, without even noticing much of a change.
- Do whatever you like. Emergency fund all paid up? No high-interest debt weighing you down? Retirement accounts fully funded? If so, you've got more flexibility. Pay down your mortgage. Start that stock portfolio you've been meaning to get going. Give to your favorite charity. Or, to heck with it, do the economy a favor and get that big-screen TV after all.
Take a little time to assess your financial situation, and determine how best to allocate your short-term windfall. If your finances are precarious, be more aggressive. Augment the tax-holiday savings with additional savings. Relatively small actions today can have a huge impact on your retirement, a decade or more down the road.
There are many money-saving tax tips out there. Get valuable guidance at these sites:
- The IRS website
- Yahoo! Finance Tax Center
- The Motley Fool Tax Center
STOCKHOLM (AFP) – A supplier to Swedish carmaker Saab said Thursday it had stopped deliveries to the brand, sold last year to luxury Dutch carmaker Spyker, because of unpaid bills.
"We unfortunately had to suspend our deliveries to Saab until further notice because of unpaid invoices," Marcus Nyman of the Swedish division of International Automative Components (IAC) told AFP.
"The amount is significant and we have to protect our own creditors," he added, explaining taht IAC, which supplies components to Saab, had had the carmaker as a client for decades.
Saab spokesman Eric Geers denied the carmaker had liquidity problems.
"We have no liquidity problems. What is happening right now are discussions between us and suppliers. There are always two sides in negotiations," he told the TT news agency.
IAC's announcement is the latest in a series of setbacks for the loss-making Swedish brand.
On Tuesday and Wednesday, Saab was forced to suspend production temporarily as suppliers halted the delivery of certain parts because of unpaid invoices.
Saab's owner Spyker said production resumed Wednesday morning at the factory in Trollhaettan, in southwest Sweden, and insisted that Saab "has sufficient means to meet its immediate liquidity needs."
Last week, the brand's chief executive Jan-Aake Jonsson said he would be leaving in May as Spyker announced heavy losses for 2010.
Spyker bought Saab from US auto giant General Motors last year, rescuing the iconic carmaker from certain closure.
Production restarted in March 2010 but Saab sold only 32,000 cars last year, three to four times less than a few years earlier.
Russian businessman Vladimir Antonov -- who has since Saab's sale said he wanted to help finance the brand but was forced out amid allegations of ties to organised crime -- said Wednesday he had put in a request to the Swedish National Debt Office to take a stake in Saab.
The authority, which has a say in ownership changes because it guaranteed a European Investment Bank (EIB) loan to Saab, said it would give its answer in a few weeks.
On Thursday, the office said Saab had asked for a new installment of its loan, which would also be guaranteed.
Saab has "received up to now 217 million euros from the EIB and we have guaranteed up to 400 million (euros) so we have no reason to oppose" the installment," spokeswoman Marja Laang said.
DUBLIN (Reuters) – Ireland tried to draw a line under its financial crisis on Thursday by saying its banks need a further 24 billion euros ($34.11 billion) to withstand further economic shocks.
Irish Finance Minister Michael Noonan also unveiled plans to restructure the country's once mighty banking sector into just two lenders made up of Bank of Ireland and a combination of Allied Irish Banks and EBS.
The total capital figure was broadly in line with expectations, but analysts feared it could rise further given the European Central Bank did not reveal plans for a medium-term funding facility for the Irish banks, as had been expected.
Europe's debt crisis has spread into its banks, which are being forced by rating agency downgrades into the arms of the European Central Bank -- lender of last resort -- as credit markets shut their doors to them.
The ECB had been expected to announce a new medium-term funding facility for Ireland's banks, which would help cap future losses from the sale of the lenders' assets.
But internal disagreements within its Governing Council over the facility meant that plans to announce the new funding arrangement just after the Irish plan were postponed, euro zone official sources told Reuters.
"It is going to be very, very difficult for those banks to raise the capital required and at some point a restructuring conversation needs to happen," said Michael Hewson, market analyst at CMC Markets in London.
Ireland's central bank said its four remaining banks would be required to maintain a minimum capital ratio of 6 percent under a so-called "stress test" imposed by European regulators which aimed to show they could withstand potential losses from a worsening of the economy.
Under the stressed scenario Allied Irish Banks needs 13.3 billion euros, Bank of Ireland needs 5.2 billion, EBS building society needs 1.5 billion and Irish Life & Permanent needs 4 billion.
Finance Minister Michael Noonan told parliament Ireland could use 17.5 billion euros of its own funds toward the cost of recapitalizing the banks and said the ECB and Irish Central Bank were committed to their funding.
He said the government would seek significant contributions from junior debt holders in its banks to pay for the cost of recapitalizing the industry and sell non-core assets to reduce the burden on the taxpayer.
Under the restructuring plans Ireland's banks will have to deleverage huge sums. Bank of Ireland will have to shed 30 billion euros of assets by 2013 and AIB and EBS combined will have to shed 23 billion euros of assets by 2013.
But he failed to address previous threats to impose losses on some 16 billion euros in unsecured senior bank debt not covered by a state guarantee.
"We will... seek direct contributions to solving the capital issues of the banking system by requiring further significant contributions from other sources including from subordinated debt holders, by the sale of assets to generate capital and where possible by seeking private sector investors," Noonan said.
The ECB is opposed to any burning of senior bondholders for fear it could send the message that governments in other indebted euro zone countries may follow suit.
Irish Central Bank Governor Patrick Honohan said the government should not act on senior debt with the green light from European partners.
"There is no question in the government's plan about doing anything to senior bondholders," he said.
A solution to Ireland's banking woes, now in their third year and the trigger for an 85 billion-euro EU-IMF bailout, would help allay fears that Dublin is in danger of a damaging restructuring that could trigger panic among investors and force other indebted countries like Portugal and Italy to follow suit.
But with Portugal edging ever closer to crisis -- figures on Thursday showed its budget deficit ballooned above target last year -- markets remained far from assured.
European stocks halted an almost uninterrupted two-week recovery rally on Thursday as rekindled fears over the European debt crisis prompted investors to book profits.
Without a medium term funding facility for Ireland's banks, Dublin could face a very harsh downgrade by Standard & Poor's (S&P).
S&P has warned it could strip Ireland of its A- rating after the results of the bank recapitalization plan. Moody's and Fitch rate Ireland at Baa1 and BBB+ respectively.
S&P downgraded Portugal to one notch above junk to BBB- this week and a cut to its banks followed on Thursday, raising the heat on Lisbon, which is widely expected to follow Greece and Ireland into an EU aid program.
The cost of insuring against a default by Portugal and Ireland rose on Thursday while Irish government bond yields remained elevated.
"You don't need stress tests to know that Greek, Irish and possibly Portugal banks are in trouble," Deutsche Bank's chief risk officer Hugo Baenziger said on Thursday.
(Additional reporting by Carmel Crimmins and Steve Slater; Writing by Sophie Walker; editing by Alexander Smith)