President Barack Obama's signed the Stimulus Act on Monday, his first major decision as president.There has been a lot of back-and-forth and downright confusion about the measure: Will the act really give the country the economic boost it needs? How will it help struggling families. ESSENCE Senior Editor for Personal Finance and Careers, Tanisha Sykes answers your questions about how the stimulus package will affect your purse strings.
Q: Last year, I've used a flexible spending account for child care and health expenses. I found that I will not qualify for the EIC (Earned Income Credit) this year. Is using pre-tax benefits better in the long run and how will the stimulus package help out with having cash in your pocket rather than waiting for tax season?-Jenny Joseph, Boston, Massachusetts
TANISHA SYKES: Anytime there is an opportunity to participate in a program with pre-tax benefits, go ahead and take advantage. That's the beauty of programs like Flexible Spending Accounts and 401(k)s. Your contributions are withdrawn before any taxes are withdrawn, therefore, your taxable income is reduced and you pay less taxes. I suspect that not qualifying for the earned income credit has more to do with a change in your situation than participating in a FSA. To be sure, check with a certified public accountant or an IRS representative at IRS.gov. By the way, with the passing of the Stimulus Package, the Earned Income Credit will increase for families with three or more children. Previously, the credit was limited to families with just two children.
Q: It seems like the stimulus bill will only lead to more inflation and eventually stagnation. Won't introducing billions of "fake dollars" into our monetary system simply collapse the dollar and isn't it true that any system built on a flat currency will inevitably fail?-Hannah Drake
SYKES: The Federal Reserve System of the United States works to make sure that overall demand meets supply. It increases or decreases the money supply by changing interest rates or the cost of borrowing money. That affects the banks that lend to one another, companies that borrow from the banks and the consumers that borrow from lenders. The reason why the stimulus package is necessary right now is because that balance is off. Therefore, the government is working feverishly to assist companies on the verge of bankruptcy, homeowners facing foreclosure, and individuals that are out of jobs. As for the state of the dollar, it was down at the end of the year, but experienced an uptick with news of the passage of the stimulus package. In the short term, this bill along with the passage of provisions concerning corporate and homeowner bailouts will eventually, stabilize our economy, over time.
Q: The stimulus bill passed at the same time when a lot of people are filing or getting ready to file their taxes. What is the best way to spend your income tax refund? Pay down debt, save or both?-Denelle Hammond, Washington, D.C.
SYKES: I'd say both, but before you do anything, have a plan for the money. As a part of your money plan, set up an emergency fund. If you can afford to, set aside half--that's right--50 percent of your income tax refund toward this goal. Why? Because the economy is shaky, layoffs are increasing and companies are closing at a rapid pace. We are in serious trouble economically, and it's important, now more than ever to have the financial stability to support ourselves in case of an emergency. Next, take 25 percent and pay down a portion of a major, high-interest debt, such as a credit card. If you owe $1,000 on your favorite department store card, pay $250 toward it. Last, spend the remainder on yourself! Otherwise, you'll start feeling deprived and it's a good way to make our economy thrive. Use this formula for whenever you get an unexpected windfall and let me know how it works.
Q: I'm in graduate school and I finish this May. I've been working two part-time jobs, but I really want one full-time job with benefits. My problem is I am living from pay check to pay check so I have nothing in my savings. I know people are complaining about the economy, but I feel like I can still do something to build up my finances and improve my credit. How can a college student prepare herself for an increase in salary and/or new job and how would you suggest she start saving?-Maria James, Virginia Beach, VA
SYKES: If you have a part-time job, one of the best things you can do is to reduce debt. Most college students are coming out of school with combined student loan, credit card and car loan debt in the thousands of dollars. So that your new income isn't just paying off bills, stop using them and start paying them, even if it's only $25 a month. Use grant money, scholarship money, or ask your parents to help you pare down that debt. It's easy to save. Again, go back to the part-time job, save $25 per pay period in an interest-bearing account like ING Direct Orange Savings Account or E*Trade's Complete Saving Account, both of which are free to set up, require no minimum balance requirement and have no monthly fees. Save a significant portion of your summer job money if possible and build a small, but consistent nest, so that when you graduate, you'll have something to build upon.
You should also be aware that the stimulus act has provisions to help college and graduate students by creating a new $2,500 American Opportunity Tax Credit that is partially refundable. As a result, the nearly one-fifth of high school seniors who receive no tax credit under the current system will now receive a tax cut to make college affordable for the first time. Also, the act will provide some funding to 7 million more students through Pell Grants and increasing the maximum award level by $500.
Q: As a single mother, what major impacts will I see with the stimulus package?-Lisha Vialet Manning, New York, New York
SYKES: One important provision is the expansion of the Child Tax Credit. Families with children will now be able to qualify for the credit with each dollar earned over $3,000. This translates into a refundable credit of up to $1,000 for each qualifying child under the age of 17.
You should also know that under President Obama's stimulus act, $1.1 billion will be allocated for Early Head Start and $1 billion for Head Start, which will not only provide services for approximately 120,000 additional infants and children but create at least 15,000 new jobs, many of which are held by low-income women. There will be a $2 billion investment in the Child Care Development Block Grant which will help those families who are struggling to afford child care and allow parents to hold onto their jobs. Not to mention, 7 million Americans who lost their jobs will now receive a new 65 percent tax credit to keep their health insurance through COBRA.