The Tax Cuts and Jobs Act of 2017 was signed in December 2017, and it will ultimately result in many Americans receiving higher paychecks this year than they did in the last.
Even though the act was signed into law before the end of 2017, the results weren't immediately seen in workers' paychecks.
How and When Americans Started Seeing Bigger Paychecks
In early 2018, the Internal Revenue Service (IRS) had to update their withholding tables based on information in the new tax law to tell employers how much federal tax to withhold from their employees' paychecks. The IRS quickly issued these tables on Jan. 11, but employers needed time to update their computer systems. Employers were asked to implement the new withholding tables by mid-February 2018.
Once employers switched to the new withholding tables, most employees saw less federal tax withheld from their paychecks, resulting in higher net pay. Some employees may have seen the withholding reduction as early as January, but almost all employees should have seen the change in withholding by the end of February.
Unfortunately, the update of the withholding tables is only an estimate of how the tax cuts will affect taxes owed at the end of the year based on the old system of calculating withholding.
In March, the IRS published a calculator on its website that allows you to accurately calculate how much federal income tax should be withheld from paychecks, based on your particular tax situation.
Taxpayers should compare the results of this calculator to the amount withheld from their paychecks and make the necessary adjustments to ensure enough federal tax is withheld throughout the year.
How Much Americans' Paychecks Have Increased
In February, LendEDU conducted a survey of 1,000 Americans asking about how their paychecks have changed, thanks to the new tax law. The respondents reported an average take-home pay increase $130.76 per month—a jump of about 3.5%.
This works out to an average $1,569.12 more per year. For many households, this is a large windfall—though others may not even notice the increase in take-home pay.
Regardless of whether the average American will notice the extra take-home pay, it could be used in quite a few different ways.
More than half of Americans plan to use the money to work toward their financial goals.
The largest group of respondents, coming in at 35.7%, plan to pay down debt faster, while 12.8% of respondents plan to save for retirement and 6.5% plan to save for their children's education.
Other popular plans included spending as usual and saving the remaining amount (19.0%), using the money for life's day-to-day luxuries (9.9%), and saving for vacation (6.3%).
Using Extra Money to Pay Down Debt Faster
While paying down debt was the most popular planned use for the extra money, not all Americans carry all types of debt. LendEDU asked respondents to select all types of debt they planned to pay down, so the following won't add up to 100%. Plans included paying down credit card debt (62.18%), auto loan debt (28.57%), student loan debt (25.77%), personal loan debt (21.57%), mortgage debt (20.17%) and other debt (9.80%).
It's no surprise that paying off credit card debt was a top priority, as the average credit card interest rate was 13.16% as of the end of 2017. However, consumers could save even more money by consolidating credit card debt to a loan with a lower interest rate. After consolidating, consumers could use the extra money from the tax cuts to pay off the consolidated loan on an accelerated schedule.
Similarly, Americans could save money by refinancing other types of debt if interest rates have decreased since they took out the loan, their credit score has increased or their financial position has improved. Investigating a possible reduced interest rate should be a top priority, as lower interest rates combined with extra payments could result in paying off debt even faster than simply making extra payments on current loans.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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