How to assess the impact of taxes on your paycheck

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Donna-MullenIn 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, you would be paying from January 1st to April 24th before any of your money could have been spent on your own expenses. That’s about 33% or one third of your pay.  For 2014 the date was April 23rd, and for 2013 it was April 18th.

Something to think about as you ponder where your paycheck is going.