One of the very most important things you can do when it comes to your personal finances is to take a good hard look at how things are going right now and make some adjustments whenever necessary.
Many years ago, when I was a young man working as an assistant buyer at Macy’s, I learned about making a good plan and how to evaluate and then re-evaluate how that plan was doing. The most important part of that concept isn’t a requirement to make changes after evaluating, but rather it’s the actual necessity to take a close look. Even if you don’t make a change in a plan, looking and doing nothing is actually doing something! Not looking is doing nothing and that can hurt your financial plans.
That’s why today I want to look at where we are in 2018, so far.
The New Income Tax Law – How is it affecting you so far?
There’s pretty good evidence that if you are working and getting a paycheck you have seen an increase in your take-home pay so far this year. The federal tax cuts in the new tax law started to show up in February this year when the new tax table withholding began to be used by employers for your paycheck.
To give you a ballpark idea of how the tax cuts have translated into higher take-home pay, payroll service provider ADP estimates a single taxpayer making $57,000 a year who gets paid bi-weekly and takes one withholding allowance and also contributes just 5% of his pay to a 401(k) has seen $60 more per paycheck this year. Someone grossing $162,000 doing the same thing has seen their take-home pay rise by $190. Married workers have seen similar increases.
Why is it you haven’t seen much of a pay bump?
What bump, if any, you see in your paycheck will depend on a lot of factors beyond your salary and how many allowances you take. That might be undercutting any increases in pay that you would otherwise be seeing from the federal tax cuts.
For instance, if your state or local income taxes have gone up or if your health benefits or other benefit deductions changed for 2018, that could curb how much extra take-home pay you get. But, you should review your withholding allowances anyway.
Here’s why: the new withholding tables may end up withholding less tax from your paycheck than what you actually will owe. Normally, withholding tables simply offer a good approximation of how much tax should be withheld from your pay, especially if you don’t itemize deductions. But this year, it could be a big miss on its approximation.
The tables do incorporate changes from the new tax law, but without requiring you to fill out a new W-4 form, which tells your employer how many withholding allowances you want to take.
The problem is?
The problem is the new law makes big changes to the elements that have driven how many allowances you’ve been claiming. It eliminates personal exemptions, reduces itemized deductions, and alters tax credits. So the number of allowances you chose the last time you filled out a W-4 might be way off now. If it is off, you may get a huge refund next year but I insist that makes no real sense since you can have it in your paycheck instead. Lending your money to the government at no interest is not smart in any way.
You can increase your allowances* on your W-4 at any time and now is a good time to do it. By the way, you can make that allowance number anything you want to increase your take-home pay (it’s perfectly legal) as long as you pay the right tax bill next April. And there is a pretty good chance you will not owe any taxes next year. If you make less than $25,000 this year, 88% of you won’t owe dime to Uncle Sam. If you choose to itemize, your income can be much higher and you can still owe nothing in the end.
* To change the number of withholding allowances you take, you need to submit new instructions to your employer. If you haven’t already done so, the new forms with the updated withholding calculations are now available through your employer.
45% of all taxpayers will owe nothing in taxes for this year!
This year 45% or about 79 million Americans will owe no income tax according to the Tax Policy Center. That’s an increase of over 2.3 million more than last year all because of the new tax laws. Believe it or not, that is still short of the record 50% who didn’t have to pay in 2009, but that was mainly due to the recession and its impact on employment.
Lower and middle income taxpayers dominate the group that pays no income tax. That’s because they don’t itemize and will now be getting double the old standard deduction and can still offset their taxes dollar for dollar with the Earned Income Credit (EIC) and in a lot of cases the Child Tax Credit (CTC). The millions of lower income people getting Social Security payments will also pay no or very little income taxes.
If you have no “earned” income you won’t be paying any payroll taxes either. Retired folks like me don’t have to worry about that one. 25% of all Americans won’t pay any payroll taxes this year.
Gas Prices – Really climbing in 2018, so far!
Gas prices are marching toward the $3 mark nationwide as we approach Memorial Day and the summer driving season.
A combination of factors have contributed to the spike, including rising oil prices from geopolitical developments such as the imposing of more sanctions and pulling out of the Iran nuclear accord, increased summer demand, adjustments to the summer blending formula, and the strong economy.
Seventeen states are already at $3 per gallon as of this week according to GasBuddy.com. The good news is this might be the peak. Gas prices often hit their high around this time of year and start declining throughout the summer. But the bad news is the per gallon price is now 59 cents per gallon higher than a year earlier according to AAA. That means the average 15-gallon tank fuel-up is nearly $9 extra each time and for many people, that translates to an extra $1,000 a year in expense.
That may mean you’ll have to adjust your driving habits as you evaluate how this increase is affecting your finances.
Inflation – Going up, up, up in 2018, so far!
If inflation were an investment, it would be a great one because so far it’s going up, up, up. The Federal Reserve is prepared to let the inflation rate run above its previous 2% target according to its policy meeting held earlier this month. Meanwhile, it appears that the central bank will continue to raise interest rates, including a hike predicted at next month’s meeting. The rate is expected to climb another 0.25% which will continue to affect us all in many ways, like credit interest rates and mortgage rates to name just two.
The view that inflation on a 12-month basis will likely move above the 2% objective would be consistent with the committee’s inflation objective and it could be helpful in slowing longer-run inflation worries. To repeat an oft used phrase, “We’ll see what happens.”
Keep in mind that the Consumer Price Index (CPI) doesn’t always reflect what most experts say is the “real” inflation number. It doesn’t accurately take into considerations some important things like the cost of medical care and prescriptions which continue to rise each month and are a major concern of those low income and Social Security recipients who may not be benefiting from things like lower taxes to help offset inflation. The Treasury market doesn’t appear concerned that the Fed is letting pricing pressure run too hot.
“Final” Thoughts, so far
The CPI has been boosted largely by rising prices for bare essentials. Here’s the list of the items that pushed the CPI higher in the last year:
- Shelter: Rent and mortgage prices are up 3.4%, contributing almost half of the total 2.5% rise in the CPI for this year.
- Gasoline: Prices are up 13.4%, contributing 0.5%.
- Car insurance: Prices are up 9%, contributing 0.22%.
- Food away from home: Restaurant prices are up 2.5%, contributing 0.15%.
- Hospital services: Prices are up 4.5%, contributing 0.1%.
- Tuition and child care: Prices are up 1.9%, contributing 0.06%.
- Food at home: Grocery prices are up 0.5%, contributing 0.04%.
- Prescription drugs: Prices are up 2.7%, contributing 0.04%.
- Water and sewer: Prices are up 3.1%, contributing 0.04%.
- Electricity: Prices are up 1.2%, contributing 0.03%.
Those ten items (out of some 300) contributed 2.3% of the 2.5% increase. In other words, those ten necessities were responsible for almost all the increase in the CPI. If you are living paycheck-to-paycheck, which of those items can you forgo or cut back on? Not many. It all means that people at the lower end of the income spectrum are feeling more stress than originally predicted, so far.
How are you doing this year, so far? Are you hitting your numbers on your income and expenses for 2018? Are you seeing more in your paycheck each week and is that offsetting the rising prices we are seeing this year? What are you looking to adjust now to help your reach your 2018 financial goals?