In order to make the best decisions about finances, it is imperative that any investor understand the impact of taxes on his or her income because the amount you make in the workplace is certainly different than the amount you take home. Let’s say your annual wages or salary is $80,000. You don’t get to bring home that much and spend as you please. First the government wants their share. Social security (often shown as FICA or OASDI) takes 6.2%, and then Medicare takes 1.45%. (And, by the way, your employer has matched that percent as well for Social Security and Medicare and it is not income to you). Now pay in your amounts to Federal Income tax (effective rate of 12%), and Wisconsin income tax (effective rate of 3%). Calculating all that out, you have $80,000 minus $4,960 minus $1,160 minus $9,600 minus $2,400 to have $61,880 remaining. Now subtract your 10% retirement plan contribution of $8,000. Don’t forget your share of your employer’s healthcare cost at $300 per month for $3,600 per year. Essentially you are taking home about $50,280 per year to spend on your housing, utilities, clothing, transportation, gifts and entertainment. Even at the $61,880 each year it can be difficult for a family to make ends meet. There is always an interesting study that comes out that shows “Tax Freedom Day”. This is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. Tax Freedom Day takes all federal, state, and local taxes and divides them by the nation’s income. This is considered about how long into a year you have worked to pay for federal, state, and local income taxes, sales taxes, real estate taxes, and all other taxes hidden in costs of items purchased. For 2015 that date was April 24th. That means that if all your pay was going toward taxes,… | Read More »
Author: Donna Mullen
Three ways to start your tax planning now
It is said that there are only two things certain in life – death and taxes. So if you are reading this, you haven’t reached death yet but you are probably paying taxes. No one likes to think about taxes, but tax planning is something that should happen continually, and not just in December. Here are some tax planning strategies you can start to consider. Harvesting losses. What do we mean by that? If you have an investment account that is subject to income taxes every year you are probably invested in some stocks or mutual funds. Since this has been a challenging year for the stock market, consider selling off some of your gains to capture them and selling some of the losers to offset those gains. That is harvesting. The IRS tax code says you can only subtract $3,000 of losses each year after gains have been offset. So let’s say you have $50,000 of gains you can capture from your investments, and you have $35,000 of losses. You would only pay taxes on $15,000 of the gains as the losses would offset your gains. What if instead your losses were $55,000? You have $5,000 more in losses than gains so you can only deduct $3,000 for this year and carry over $2,000 for next year. Stacking itemized deductions. This takes planning for two years at a time. Let’s assume you are below the phase out levels for itemized deductions. If you have a larger amount of income this year than usual, you could consider making state income tax estimates by December 31st to count for the current year. Consider making extra charitable contributions before December 31st. If you usually pay your real estate taxes in January through July, consider paying most of them in December. Try to leave $2,500 of real estate taxes on your personal residence for the following year so you will get the Wisconsin… | Read More »