New Jerseyans are in store for a double windfall during the next few months. Not only will we be receiving our state property tax relief checks this fall, but President Bush and the U.S. Congress are also sending us a federal tax refund. Federal tax refund checks will be sent according to a staggered schedule, based on the last two digits of a person's Social Security number. For couples, the IRS will use the first Social Security number listed on a couple's tax return.
The mailing of federal tax refund checks (there was no time to verify bank account information for direct deposit) will begin the week of July 23 and continue through the week of September 24. If you're planning to move in the next few months, be sure to notify the IRS so your check is not delayed. Ditto for notifying the state Division of Taxation so that you receive that check also.
The federal tax refund is a result of a change in the structure of federal marginal tax brackets. A new 10% marginal tax bracket was added, reducing the tax rate from 15% to 10% on the first $6,000 of taxable income for singles, $12,000 for married couples filing jointly, and $10,000 for heads of households. This translates into a $300 refund for single taxpayers, $600 for couples, and $500 for heads of households who earn the full amount of income in the 10% bracket for their tax filing status. For those who earn less than the full 10% tax bracket amount, refund checks will be pro-rated.
So what are you going to do with these two windfalls? This is an important question because some families will be receiving around $1,000 from both the state and federal rebates combined. Now is the time to make plans for wise use of this money because it is a significant enough sum to affect your future financial security. Below are several ideas to invest it for your future:
First, there is probably no better "investment" of $1,000 than to repay consumer debt (e.g., outstanding credit card bills). Paying off an 18% credit card is equivalent to earning a 25% return for a person in the 28% tax bracket (18 divided by 1-.28 (.72) = 25). That's because you'd have to earn a 25% return to be left with 18% after taxes. Unlike investments, like stocks and bonds, the amount that you'll earn by repaying debt is guaranteed and tax-free.
If you have no outstanding consumer debt (congratulations!), consider investing your tax rebates. A number of low-cost investment alternatives are available, including mutual funds that require $1,000 or less to open an account and hundreds of stocks with direct purchase plans (check the Web site www.netstockdirect.com). In addition, U.S. Treasury securities (bills, notes, and bonds) are available in $1,000 increments, as are unit investment trusts and corporate bonds. Don't think a $1,000 investment will really matter? Think again. With an 8% return, your money will double in nine years according to the Rule of 72. At the end of 20 years, your one-time $1,000 investment will grow to $4,660. Check the Web site www.investing.rutgers.edu for additional investment ideas.
You could also use $1,000 to fund half of your 2001 IRA. Check the calculators linked to the Web site www.rothira.com to determine whether a traditional or Roth IRA is a better choice based on your age, planned retirement date, and marginal tax bracket. You are allowed to contribute up to $2,000 maximum to any IRA or combination of IRAs. In the years 2002-2004, the maximum IRA contribution amount will increase to $3,000 and eventually rise to $5,000 in 2008 and later.
Another good option is to invest in yourself or, as economists like to say, "build your human capital." Take a course or other job training experience to improve your knowledge and skills. It could eventually lead to a raise or promotion and pay back your tuition payment many times over. Two good places to continue your education are county community colleges and professional or trade associations related to your occupation.