The Tax Code Changed—Now What?
From the April 2018 issue of Hark!
The federal tax code was updated significantly under legislation passed at the end of 2017. While the full impact is still being debated, revised wage withholding tables may provide a boost to your take-home pay. So how much extra will you get and what could you do with extra cash?
Figure Out the Impact
The changes to your after-tax income are highly dependent on your personal tax situation. The impact may be very different for a married, childless person in Texas than for a single parent in California. The impact may also depend on whether you typically apply the standard deduction each year, or if you itemize deductions. Consider discussing your particular circumstances with a tax professional to find out what changes to expect in your after-tax income.
Also, consider adjusting your federal income tax withholding if you will have fewer deductions under the new law, to make sure you aren’t under withholding for taxes.
Pay Off Debt
It can be hard to reduce debt when you have other competing financial priorities. However, using unexpected extra take-home pay toward debt can help you pay it off quicker. Focusing on paying off debt can also help down the line, because you will save what you might otherwise pay in interest on your debt.
Create an Emergency Fund
Having an emergency fund is also important. If you don’t have emergency savings, financial emergencies (e.g., job loss, significant medical expenses, home or auto repairs) can require you to dip into savings or eligible retirement accounts. That’s why financial advisors recommend that you set aside at least three to six months of living expenses in an accessible account (such as a savings or money market account).
Additional take-home pay may be just what you need to start or fund your emergency account. Consider making automatic deposits into your emergency account from your main account on your payday. If you hold accounts at separate banks, you can often transfer funds between banks for free.
Invest It in Your Future
When you receive a boost in take-home pay, it’s easy to spend the extra money if you’re not intentional about saving. Consider saving your extra income for the future through contributions toward your United Methodist Personal Investment Plan (UMPIP) or Horizon 401(k) Plan account.
Retirement account contributions give you even more of a tax benefit. Contributing to your plan with before-tax income can help reduce your current taxable income, so less federal tax is withheld from your paycheck. And investment earnings on these contributions are tax-deferred until you take distributions from your account. Your contributions could provide up to double the value if you participate in CRSP or if your plan sponsor offers matching or conditional contributions.
Remember, you can change or increase your contribution amount or percentage at any time. Simply submit a Contribution Election form to your conference or salarypaying unit to begin contributing or to increase your contributions to UMPIP or Horizon.
Wespath offers one-on-one, confidential, professional financial planning assistance at no additional cost to you from EY Financial Planning Services.1 EY can help you plan for the tax changes or help with other financial questions or concerns. Call EY at 1-800-360-2539 or visit their website at https://wespath.eyfpc.com.
1 Costs for EY Financial Planning and LifeStage services are included in Wespath’s operating expenses that are paid for by the funds. EY Financial Planning Services are available to active participants and surviving spouses with account balances, and to retired and terminated participants with account balances of at least $10,000.