Barrels of media ink have been spilled over the 25 million checks Uncle Sam mailed out as advance refunds on the 2003 child tax credit. Plenty of attention has been given to other aspects of the so-called Jobs and Growth Tax Relief Reconciliation Act of 2003, too, including dividend and capital gains cuts and increased deductions for business owners. But little notice has been paid to the one thing that almost all taxpayers can do immediately to take advantage of the legislation- the withholding from their paychecks to reflect new, lower marginal tax brackets.
The tax bracket changes are relatively small, so the extra money in each paycheck won't be enough to overcome fiscal inertia in many households or to get the nation's financial advisers clamoring about the oversight. Still, if you don't make the change, you're paying the government too much money and will have to wait for your tax refund to get it back.
Under the new law, the 38.6 percent income bracket drops to 35 percent; the 35 percent bracket falls to 33 percent; 30 percent dips to 28 percent; and 27 percent goes to 25 percent. Plus, the basic standard deduction jumps for millions of taxpayers. Granted, it doesn't sound like a lot, but for a married couple filing jointly and making $75,000 per year (in the new 25 percent bracket), a tweak in the withholding could add $125 per month to take-home pay.
For certified financial planner Rick Fingerman, president of Financial Planning Solutions Inc. in Medford, Massachusetts, it's an easy call. "More money in your pocket now is better than more money left to Uncle Sam until refund time." The exceptions, he says, are people who can't seem to save other than through withholding and couples with self-employment income whose taxes tend to get a little fuzzy each year.
Even the forced savings component tends to be overstated, Fingerman says. Surveys have shown for years that most people spend their refunds rather than tuck them into retirement funds or use them to prepay the mortgage. (Although, to be fair, a substantial minority does pay debts with the yearly windfall.) Instead, put that $125 extra from each paycheck in the 401(k) plan, Junior's education fund, or a more sizable payment on that nagging credit card balance, and the immediate difference for your finances can be significant.
Scott Bernard Nelson is a financial writer at The Boston Globe.