Tax 101 - out in the real world

[jkskier]

I just got out of school and I'm trying to figure out how taxes work...hopefully some of you can figure out the K.I.S.S. philosophy behind it which is what I'm after. We'll assume for our purposes that gross income is less than $50,000/year.

From what I've read there is Income tax and Payroll tax.

Income tax is taken out of each paycheck and dictated by the W4 allowances you claim. This also relates to whether or not you receive a tax refund or tax bill each year after you file. On one website I looked at, someone making $40,000/year would have around $6400 throughout the year taken out of their paychecks.

Payroll tax, from what I understand, is the portion of your yearly federal tax obligation, in addition to the Income tax discussed above, that must be paid at the end of the year in one lump sum or through a government provided payment program. My main question here is how to calculate that so that I can save some money out of each check and avoid getting into debt with the government at the end of the year.

Is this correct or is this end-of-year lump sum which I denoted as 'Payroll tax' in the last paragraph purely fictional for a low-to-mid-earning corporate employee? I'm scared to death because if I have to save a percentage of my income beyond what is already taken out of my check when I receive it, I'm not going to be able to repay student loans.

I should add that I am thinking about the 2008 year as this will be the first in which I have been out of school and in the work force for an entire year.

[jtw2]

claim 1 maybe 2 deductions on your W4 and you'll be just about even come tax time.

[jkskier]

So no end of the year lump sum tax payment will be due?

[jkskier]

I'm trying to figure out if the W4/paycheck relationship dictates everything or if our tax loving government is going to hit me up again.

[jtw2]

nope it determins pretty much everything. you'll have 4 different deductions taken out. state income taxes, fed taxes then social security and medicare. If you are making less than $50k you should be fine claiming 1 deduction and 2 if you have a house or have major capability to itemize.

[jtw2]

I claim 5 but my tax return is about an inch thick.

[bsaunder]

payroll tax and income tax are the same thing - depending on how much you make; you will owe a certain amount at the end of the year. If it isn't taken out of your paychecks, or too little is taken out, then you will owe.

The deductions on your W4 largely determine if you will owe at the end of the year or not. As for doing your taxes - getting a 1040 and filling it out by hand isn't that bad; but you can also get decent software to guide you through it for ~$30 that is pretty straight forward.

[jkskier]

Thanks guys! It's good to know that I can afford to exist!

[cheftyler]

Good on ya for figuring it out now vs next April :D And it's complicated but not as complicated as you're making it out to be :D

[jdbwrx]

Here's tax in my real world: I got engaged to a CPA! She does my taxes, I cook and rotate her tires. :D

Doing a 1040EZ is just that, pretty EZ. If you don't own property, have kids, or any other things that would require you to do itemized deductions, it's pretty straight forward.

When I hear the term Payroll taxes, I always connect that with what the employer has to pay.

I have always broken it down to this on the W-4: If I claim 0, the government takes more money now and I get a nice refund about this time of year. Claim 1 if you want a little more on each paycheck, and less of a refund. Any more than that, and you will probabaly have to pay. I know people that change that number throughout the year, but that always seems like too much work.

[Sprnklrmn]

Another way to kind of check your progress would be to pick up a 140EZ form and instructions now at a library. Around about June or whenever you hit halfway on your yearly pay (e.g. if you are paid bi-weekly it would be your 13th check of the year) take your pay stub and double all of the amounts. This will give you a good approximation of what your W-2 form in January will have on it. Now fill out the EZ form and see what it tells you.

If the amounts are such that you will owe $1000, then go to your employer and tell them you want to change your W-4 withholdings. Fill out a new form and don't owe a bunch of money in April.

If the amounts are such that you will receive a large refund, then you could stand pat, or you could change the W-4 withholding amounts to a lesser amount. Take the difference and save it, with you keeping the interest that money generates instead of the government.

All figures are approximate, because tax amounts seem to change from year to year, as do income brackets, but it'll be pretty close. Good on ya for thinking about it, figuring out how it works and watching for it. Big, unexpected tax bills in April bring the suck.

[jtw2]

and don't forget that a big fat refund is about the stupidest thing that people do with their money. It just means you gave someone an interest free loan for a year.

[jdbwrx]

and don't forget that a big fat refund is about the stupidest thing that people do with their money. It just means you gave someone an interest free loan for a year.

I don't know if it's the Stupidest thing to do with your money...Our Jeeps are probabaly not the best return on our investments. (monetarily speaking);)

[Gunter]

and don't forget that a big fat refund is about the stupidest thing that people do with their money. It just means you gave someone an interest free loan for a year.
that where you are wrong.
having kids makes a huge difference.i claim 4 and still end up on the plus side of the refund.and tax check has been a huge help for me.
and i'd rather just have a job that paid well,but this will do for now.i paid xyz in taxes,but get other goodies from the guberment to the tune of thousands of dollars.i dont pay in thousands of dollars,so they dont use my money,but they do give me lots of your money LOL in taxes as credits etc.:P:beer:

[Steve]

i claim 4 and still end up on the plus side of the refund.and tax check has been a huge help for me.

Plan ahead better. Reduce your withholding and put that money into an interest bearing savings account. Letting the government use your money with no interest for a year is one of the stupidest things you can do with it. But, it's a great savings account for those who can't or won't plan, or who don't have the willpower to save any money.

[newracer]

that where you are wrong.
having kids makes a huge difference.i claim 4 and still end up on the plus side of the refund.and tax check has been a huge help for me.
and i'd rather just have a job that paid well,but this will do for now.i paid xyz in taxes,but get other goodies from the guberment to the tune of thousands of dollars.i dont pay in thousands of dollars,so they dont use my money,but they do give me lots of your money LOL in taxes as credits etc.:P:beer:x2 I get back more than paid in.

[ni0h]

For future reference, "payroll taxes" refers to costs of you being an employee - social security,medicare, etc.. income taxes are costs of your receiving your income. On your W2, everything but "income tax" is "payroll tax". Since payroll taxes are more a "per person" than a "per dollar" idea, they're sort of regressive - they hit low earners more than higher ones.
You don't have to worry about holding extra for them. If you're taking only legal deductions on your W4, unless you've got a lot of outside modifications to your income, at worst you'll have to pay instead of getting a refund (beats letting the government have your money all year interest-free).

For some reason, we always get a little federal refund and a similar-sized bill from the state. There's no mechanism for tuning federal vs state, so we just file fed electronically and take the refund direct deposit, and drop the state in the box on Apr15 with a check.

[ColoradoXJ]

just another fyi... if you make less than $26k a year, you can use turbotax online and efile for free*... it's freakin super simple and they walk you through EVERYTHING :P


*you have to pay like $5 to get your state one efiled...

[denverd0n]

...hopefully some of you can figure out the K.I.S.S. philosophy behind it which is what I'm after.
K.I.S.S philosophy behind taxes!?! Oh God!!! I'm tearing up here. Now THAT is just TOOOOOO funny!!!

[Jeff Mason]

K.I.S.S philosophy behind taxes!?! Oh God!!! I'm tearing up here. Now THAT is just TOOOOOO funny!!!

Not if he is young, single, has only income from a single job and lacks enough deductions to itemize on his return. If you truly just have a W2, there is nothing much easier than filling out the 1040EZ.

When you start having lots of interest income, self-employment income, rental income, deductible expenses (interst, prop taxes, donations, higher than 'normal' income levels, etc.) then the returns and tax laws get complicated.

I had friend that used to go to H&R every year to get his returns done. They charged him $75 (that was 14 years or so ago) and the had to fill out 3 or 4 lines on each form. I did it for him for free. (oh, and a nice power tool would show up on my porch a few days later :D )

[denverd0n]

Wow! Frankly, I'm amazed and a bit saddened by the misinformation here.

Okay, first off, you'll have federal withholding, state withholding, social security tax (OASDI), medicare tax, and depending on where you work possibly a city tax all withheld from your paycheck.

Federal and state withholding are just that--they are holding some of your money. That is NOT the true tax that you pay. They are just keeping some of your money on the assumption that on April 15 you will owe some tax, and they don't want you to have to write a check for the full amount all on that day (because if you did you would vote every damned incumbent out of office at the next election!). So, at the end of the year you figure your TRUE tax, and either have to pay some more to make up the difference, or get some of it back.

As has been mentioned, anything you get back at the end of the year was just an interest free loan that you gave to the government. Unless you are complete CRAP at managing your money, you are better off owing something on April 15, or at least only getting back a very, very little bit.

Now, the social security and medicare taxes are different. These really are taxes that you are paying with each paycheck. It is not just withholding, you don't figure out and file your TRUE taxes at the end of the year, and you won't get any of if back (or have to pay any additional). The ONLY exception is if you changed jobs during the year, earned more than $102,000 between the two jobs, and ended up paying more than the maximum limit for the year, in which case you get a refund of the over-paid amount.

Specific answer to your question... No, there is no lump-sum payroll tax that you have to pay at the end of the year. If you do not have enough federal and state withholding from your paychecks then you might have to make a large payment on April 15 to cover the shortfall. This might be what you are thinking of. The solution is to do a quick calculation of your expected taxes relatively early in the year and make sure enough is withheld to cover most of it (or all of it, but not much more than that).

The truth, though, is that the "normal" withholding is pretty close for someone with a simple and straightforward tax situation. If you don't own a home, and don't have any kids, and won't be earning a lot from investments, then claiming one exemption (for yourself) on your W4 will probably get you pretty close to where you need to be. Then next year, you'll be able to calculate it more closely and adjust appropriately.

Hope this helps. If you have more specific questions feel free to PM, if you don't want to share financial details in public. Good luck.

[CherryokeeXJ]

And here I almost forgot why we keep having kids.

Writeoffs. :D

[denverd0n]

Not if he is young, single, has only income from a single job and lacks enough deductions to itemize on his return. If you truly just have a W2, there is nothing much easier than filling out the 1040EZ.
Well, I would agree that that is about as simple as it gets. Still, if you want to actually understand the differences between withholding, taxes, SS, medicare, and all that, then there is nothing really simple about it!

I read an article several years ago written by a tax adviser. He did a somewhat non-scientific poll where he asked a random sample of people, how much income tax did you pay last year? About 3/4ths of the people answered with something along the lines of "Oh, I didn't have to pay anything. I got $150 back!" or "I only had to pay $45 with my return." In other words, they had no friggin' clue how much income tax they paid. All they knew was their refund or additional payment at the end of the year.

I find that very, very sad.

[Yota]

A single person taking the standard deduction will get a return if he claims 0 dependents. You might even get a return claiming yourself as a dependent (1). But I always hate to pay the bill at tax time so I never risked it. People gripe about "giving Uncle Sam an interest-free loan" when you get a refund check, but if they ever bothered to calculate how much that interest is it ain't much. If you get a $1000 or $3000 check, it's not like Uncle Sam holds $3000 for the entire year. It accrues through the year. So the interest on it doesn't amount to much and I don't really worry about it.

But having to cough up a bunch of cash at the end of the tax year just pisses me off and it's worth the pittance cost not to have to do that. Not having unexpected tax bills was far more important to me when I was young and single and, usually, broke.

[Jeff Mason]

If you mess up your W4 and have $100 extra withheld every month, that works out to about $33 in lost interest for the year. That's at 5% interest, which is about twice the current bank rate for a savings account.

At some point, the loss of the use of funds becomes an issue. Some will argue that you could have invested that $1200 in stocks and doubled your money. Or, you could have bought a dog stock, and lost most of it.

I submit that for the VAST majority of folks, the time spent in filling out forms, etc. to adjust withholdings negates the $33 in interest.

And, like Yota said, I believe getting back a small refund beats having to pay any amount at the end of the year for the VAST majority of folks, especially those with limited discipline to save...

[denverd0n]

But having to cough up a bunch of cash at the end of the tax year just pisses me off...
I agree. If I have to pay more than a few bucks on April 15 I am not very happy.

The main thing, though, is that you have to realize that you are only getting your own money back. Now, I know that you already know that, Yota. And most of the folks on this board, I'm sure, are smart enough to figure that out, so please don't anyone here take this personally (although, if the shoe fits...).

The plain fact of the matter, however, is that there are a whole lot of people out there who think they are getting some big gift from the government when they receive a check at the end of the year. They look at it as if this is money that is being paid to them. IT IS NOT!!! It's just their own damned money finally being given back to them, but they don't allow themselves to see it that way.

So, I'm not going to say anyone is doing anything wrong, or being stupid, or anything like that if they have enough withheld to get some back at the end of the year. But I will say that they are being absolutely moronically STUPID if they fool themselves into thinking that this is money they are getting from the government, instead of realizing that it was their money all along and they just let Uncle Sam hold onto it for them for a while. Unfortunately, there are way too many people who DO delude themselves in that way.

[Yota]

I do see it that way. It's my money. I sorta look at the interest I lose due to overwithholding as a penalty for not being more disciplined at saving.

I use that refund money to invest in big ticket items that I need. Like last year I invested in energy-efficient windows for my house, which sorely needed them. And actually I bought the windows on a 0-interest same-as-cash deal and have let the money sit in a 5% APY savings account (the E-Trade one that several people on here have used) all year. I'll pull it out next month and pay off the windows with a few hundred extra bucks (which is taxable :( ). But it's still slightly better than if I'd just plunked down cash a year ago. It's like getting one or two windows for "free."

It's true that if I had invested that money in 2006 instead of letting the gubment hold onto it I might have started the game in 2007 with a few bucks more. But the fact is that I would have piddled some of it away on expenses and small-ticket items and probably would save less.


And this year I'll do something like this also. If not, the money gets otherwise invested (probably toward paying off my HELOC, which has a floating interest rate).

It ain't the slickest way to save cash but it always works and it provides a hedge against any big tax surprises at the end of the year like unwittingly getting slapped with AMT or crossing some unknown income threshhold that negates some deduction (we've run into this already on a few things).

What really grinds my gears is that moment each year when I look at the Total Tax line on my income tax statement. Wow. That's a punch in the kidney.

[denverd0n]

What really grinds my gears is that moment each year when I look at the Total Tax line on my income tax statement. Wow. That's a punch in the kidney.
At least you look at it. At least you're aware. There are a HUGE percentage of the people out there who, on April 16th, couldn't tell you anything beyond how much their refund was (or what they had to pay).

[jtw2]

I fully remember my gross earnings as an adult being less than what I pay in taxes now. :eek:

[scottycards]

I'm doing my taxes right now- filling out the little planner for the tax guy.

Hey-soos, it's a banner deduction year for the scottycards household. As JTW said- I remember making less than I'm deducting now. Just being organized really adds up the deductions.

Although I gave the gov't an interest free loan for a year, the fat refund is going to be well-enjoyed.

[jtw2]

I still owe the IRS about $8k. should pay it off next month and be even with them again.

[jtw2]

but next month a quarterly tax payment is due as well :(

[scottycards]

Taxes are done, sealed up in the envelopes, and are to be mailed today.

Good God, they are complicated- even just flipping through and reviewing all the additional forms, schedules, etc, was mind boggling. My tax guy had me pulling out records and statements from years ago. Best money I'll spend all year is having him prep my returns.

I don't know why anyone would do their own taxes, or use a prepackaged software system. After meeting with my guy, and having an in-depth discussion with him, I just can't see all the deductions and benefits he discovered for us being available through any other means. This guy is a wizard.

I won't disclose what I paid as a percentage of our income, but it's a figure that really has me shaking my head, and I was literally walking on air last night at home.

Stoked.

[CSP]

I'm a CPA and use pre-packaged software. Granted I don't specialize in personal tax, but I do my research and inquire with tax CPAs friends to see where loopholes are I can take advantage of and have yet to find anything that the software hasn't.

Most people don't have circumstances where loopholes would matter and require a tax CPA. Hell, most of the places where people do go to have their taxes done, like H&R Block for example, aren't fully staffed by licensed and current CPA's anyhow.

[scottycards]

Maybe that's the case, I don't know, and for what I spent to have the taxes done for me, my time is more valuable, as is my sanity.

I was thinking I need to go and pull some old returns, and see how they compare. I know that there are mitigating circumstances, and this year for us included a lot of unusual stuff, but it'll be interesting to compare a year where the income was comparable and look at how the amount of tax varies (or doesn't).

Maybe this rental house deal and subsequent selling of it will turn out to be worth all the friggin' headaches I've endured over the last couple of years. It sure appears to be- on the surface, at least.

[Jeff Mason]

Be careful, I just saw a chart on the internet that says taxes were higher under Clinton than under Bush. If you pull a return from prior to 2001, you may not get good data to compare to! :D :D :D


I'm also a CPA, but I stay as far away from Taxes as I can. For all personal returns, I use canned software, but the situations of those folks that I help with a return are pretty 'normal'. W2 income, a little interest income, some basic deductions.

With an investment house, and current tax laws, there are probably a number of different tax approaches that you can use to report results (i.e. depreciable lives, qualifying expenses on the property, etc. etc. etc.). It makes my head spin to think about it.

[scottycards]

Well, some of my best income years were under Slick Willy and the Silicon Valley boom (selling EDA software tools), so I'll pull from then. I had a rental at that time as well, so it would be more apples to apples probably.

[CSP]

I'm also a CPA, but I stay as far away from Taxes as I can.

Aint that the truth!

Do you get funny looks from people when you tell them you don't do taxes? It seems that most people associate CPA with taxes only.

[Jeff Mason]

Yep, then I tell them my background is as an auditor, and they think I worked for the IRS...

[jtw2]

no way in hell would I do my own taxes. have a cpa for that. no idea what he uses and don't care as long as he lowers my tax liability.

[jkskier]

Hell yeah, this turned out to be a really good thread!

I think I'm going to change my W4 to 1 deduction, just to be safe. Plus, I'm the guy that processes that crap at my company so it would be pretty darn easy.

[sonofmayhem]

Im with yota. I don't mind the Tax free loan. I see it as helping my gov't:D

I did get a good amount back, however I tossed it into my ING account. Already gained $3 in interest in about a week.

I used the free edition of turbotax and paid about $80 to have it filed electronically, but it went butter smooth. Both returns were in my account the same week.

[jtw2]

good gawd, you paid $80 for the privilege of getting your own money back faster?

[ColoradoXJ]

yeah... i was wrong. it cost me $30 to get mine efiled and then direct deposited. not too shabby though. $30 out of $1100 refunded ain't that bad.


of course, my total taxable income last year was only $9k... gawd i hope that changes this year :hail:

[Oscar]

dang I am getting only 300 bucks

[jtw2]

yeah... i was wrong. it cost me $30 to get mine efiled and then direct deposited. not too shabby though. $30 out of $1100 refunded ain't that bad.


of course, my total taxable income last year was only $9k... gawd i hope that changes this year :hail:

so you got a 10% refund of your total earnings!

damn, wish I got that. I'd get around $15k from teh gubmint.

[ColoradoXJ]

i actually earned about $17k, but after school and work deductions it came down to that. works for me. like i said, hopefully i make better money this year, seeing as i'm not a student anymore.

[jtw2]

good luck mang. you'll be shocked at how much they will take from a real job.


The more money people make the more they tend to grow out of a liberal mind set. (not saying you have one of course!)

[ColoradoXJ]

oh i know. in 2005 i made almost $50k building modular homes. everything was a writeoff and i even had a freakin accountant do my taxes cause it was too much for me to do. i got a couple thousand back that year, then in 2006 made about $35k and only got back a few hundred. i don't really care about the amount of money i get back (if at all) making more money, it'd just be nice to not live paycheck to paycheck :P

[Oscar]

doesn't eveybody live that way

[ColoradoXJ]

:shrug:

good question... i would prefer to not have to, meaning that i would be 'able' to take care of what i needed to for a couple months if i were to say, lose my job or etc. working at a bar does not afford me that luxury, but making a decent paycheck where even after taxes and bills and a little bit of play money there was some left over to put in an account for just such an instance.


<hijack over>