Prudence stressed for tax windfall
By COREY DAVIS
Friday, January 12, 2018
Many employees working for companies across the Twin Counties could see a short-term increase in their pay as a result of the newly signed tax reform bill in December, and financial planners have some advice for how people should make smart decisions with their additional income.
Reports said the tax reform bill that President Donald Trump signed into law in December created an opportunity for businesses across the country to give salary increases to employees. Already, reports said, several companies have announced that they will provide cash bonuses to employees in the first quarter of 2018.
Kathy Kraeblen, a senior wealth strategist with PNC Wealth Management, said one million American workers in more than 100 companies are set to receive a bonus, pay hike or retirement increase as a direct result of the tax reform package. Kraeblen said PNC is one of the companies that will be giving employees bonuses as some businesses are paying employees reportedly as much as $3,000 in bonuses.
“It hasn’t been a lot of inflation in general and wages haven’t been going up for workers for quite sometime, so some people feel overdue,” Kraeblen said. “This is wonderful news and certainly an interesting side effect from the tax reform legislation.”
Adam Hodges, director of operations at Crown LSP Group, didn’t say whether or not the company was going to give bonuses to employees as a result of the tax reform. N.C. State University economist Dr. Mike Walden said a big part of the tax bill on the business side is the much lower tax rate for companies and the feeling that the bill will help spur business expansion in 2018. He added it should have a positive benefit to workers with a chance to see wages pushed up.
“Anytime we can save money in taxes it’s going to directly go to new business development or to our employees in some way,” Hodges said, “so this is definitely positive news for us.”
Kraeblen said it’s important for people who receive the extra money to make smart and responsible long-term decisions about their additional funds. Kraeblen said one of the best ways to use the additional money from a financial planning point of view is paying down debt.
She added people tend to overspend during the holidays, with much of those purchases being placed on credit cards. Early reports show that U.S. year-end holiday retail sales rose 4.9 percent compared to the same period last year. Credit cards have high interest rates, so to help minimize this, people might want to consider using the funds to pay down credit card or other debt.
“If you receive a $1,000 bonus, it might be good to use all or most of that to that credit card debt to sort of chip away with that,” Kraeblen said.
Kraeblen said another major suggestion is to use the money to start an emergency fund for both short-term and long-term financial reasons.
“I look at that in two different ways, with one having cash kept on hand for something unexpected that you can’t anticipate like severe maintenance problems with your vehicle,” she said. “It’s important to have some money for things that you didn’t budget for so that you don’t have to use a credit card. There is another rule of thumb out there about having emergency funds to cover essential expenses like housing, food, transportation, health care for maybe three to six months because things happen like somone losing a job.”
Kraeblen also said people could use their funds as a way to increase their 401(k) contribution or invest in an Individual Retirement Account, which allows people to invest for retirement on a tax-deferred basis and a person’s contributions can be tax-deductible.
Lastly, Kraeblen said, the funds could be used for parents to add to their child’s 529 Plan. People traditionally use the plan to save for higher education, but the new tax reform bill expanded the use of 529 plans to cover expenses for kindergarten through 12th grade and also for private and religious schools. The limit is $10,000 a year for those types of expenses, Kraeblen said.