6% raise, followed by a 12% cut

If you could boost your take home pay 6.2% for the rest of the year but the tradeoff is that you’d have to repay it in a 12.4% bite from your paycheck starting early next year — would you take the deal? Or would you politely tell the boss that while you could use extra money between now and Dec. 31, you don’t want to head into 2021 with a lot less spendable income. Most would probably choose the latter option. But if you work for Uncle Sam, or are in the Army, Navy, Air Force, Marine Corps or Coast Guard — it’s a done deal. You are part of the feast-now-famine-later plan by politicians to ease the current economic situation by giving more of your money back too you.

Unless…

Sometime after the November election either the current or the incoming Congress votes in 2021 to cancel the payback provision. Lots of money — some from your purse or wallet — is riding on this. That would be a cash break for feds and the military but nothing for the majority of American workers whose employers didn’t take the deal. But there is no guarantee the payback will be rescinded.

For now, here’s the deal: If you work as a civilian federal worker or are a member of the armed forces you had no choice in the decision The White House and Congress have deferred the Social Security payroll tax for 8 pay periods of this year. The U.S. Postal Service opted out of the plan, as did many if not most private sector employers. But it is mandatory for members of the military and for about 1.2 million white collar and blue collar workers.

Last month Federal News Network explained how it works and provided a calculator you can use to see its impact on your paycheck for the rest of this year and into 2021.

This week on Your Turn we will be talking with Retired Gen. Mike Meese. He’s president of American Armed Forces Mutual Aid Association (AAFMAA) and an expert on the tax deferral plan and its impact on federal and military paychecks. He also is going to talk about how you can avoid going in a financial hole by setting aside your 2020 take-home pay raise to augment or create an emergency fund for 2021 or the future. You can tune in at 10 a.m. EDT streaming live here or on the radio at 1500 AM in the Washington D.C. area.

Here’s how he explains the complex action:

“On August 8, President Trump authorized the Treasury Department to defer collection of payroll taxes for everyone earning up to $8,666 per month. The President can defer taxes due to the emergency, but only Congress has the authority to forgive taxes.

Employers have an option of whether to implement this deferral and the federal government has chosen to implement it for all federal employees and the military.

Consequently, all enlisted service members, warrant officers through CW4, and officers through O-4 received a 6.2% pay beginning in their September midmonth deposit. That will continue for 4 full months until the end of December. That is great news.

However, the same people will have to pay back that money in the first four months of next year—and the taxes will be re-imposed, so they go from a 6.2% raise to as much as a 12.4% pay cut.

To make the math easy, the example there is a Navy Lieutenant Commander with 14 years of service. She will take home $500 more each month from September to December, but then will take home $1000 less in January, when the $500 payroll tax is again applied and the $500 in deferred payroll taxes owed is also taken out.

For an Army Captain with 6 years of service, he will see an extra $380 per month from now until December and then have a pay decrease of $760 per month starting in January.

Finally, for an Air Force Technical Sergeant (E-6) with 12 years of service, he will see an extra $250 per month from now until December and then have a pay decrease of $500 per month starting in January.

Congress could defer the payroll tax and all of us could speculate on what kind of political scenario would lead to that. However, I think the best approach is to assume that Congress does not approve the forgiveness and we should tell military and federal workers to save the money.

Also, most civilian firms are not implementing the deferral, for at least three reasons:

  • It really does not help workers in the long run and could confuse them in the short run.
  • It is complicated and the employer is required to recoup the deferred taxes next year.
  • If a worker leaves his or her job, they will still owe the taxes and the employer does not want the IRS to come after the firm to get the back payroll taxes from a worker who has left.”

Nearly Useless Factoid

By Alazar Moges

Did you know that the current American flag was a result of a school project? Can you believe that the resulting grade on the project was only a B minus? In 1958, high school student Robert G. Heft of Lancaster, Ohio, was spurred on by his interest in politics and talk of Alaska and Hawaii becoming states to design a 50-star flag as a school project. His teacher, Stanley Pratt, gave him a B minus on the project, describing it as unoriginal. However, he would grant Heft a higher grade if Congress accepted the design. Thanks to the late congressman Walter Moeller, Heft earned his gold star when the design was accepted in 1960.

Source: Library of Congress

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THRIFT SAVINGS PLAN TICKER

Oct 29, 2020 Close Change YTD*
L Income 21.4513 0.0314 1.59%
L 2025 10.2950 0.0346 -
L 2030 35.1256 0.1462 1.76%
L 2035 10.3802 0.0473 -
L 2040 38.6498 0.1922 1.73%
L 2045 10.4416 0.0555 -
L 2050 22.5586 0.128 1.64%
L 2055 10.5611 0.0752 -
L 2060 10.5612 0.0753 -
L 2065 10.5612 0.0752 -
G Fund 16.4844 0.0003 0.76%
F Fund 20.9739 -0.0509 6.75%
C Fund 49.1202 0.5843 5.50%
S Fund 59.6906 0.5324 3.45%
I Fund 29.4250 -0.0061 -6.83%
Closing price updated at approx 6pm ET each business day. More at tsp.gov
* YTD data is updated on the last day of the month.