I’m not usually a fan of Mondays, but yesterday was alright. Why? Tax refund, that’s why! In the early hours of the morning yesterday, the IRS elves released my refund and it quickly arrived in my checking account. How much did I get?

$220 (FED) + $112 (STATE) = $332

Definitely not a case of the Mondays! This amount covers the recent study abroad deposit I had to send in, just as I expected it would.

As I’m sure someone will point out, this is money that I overpaid the government. I could have adjusted my withholding and received more pay per paycheck. Then I could have saved it myself instead of giving the government an interest free loan. Blah, blah, blah. Doing that would have been a pain in the a$$ though. In the previous 2 years I’ve worked, I’ve had no income tax liability because my earnings were so low. This year though, there was a legitimate chance I would pay taxes. Bummer, right? I realized that after a few $350 weekly paychecks from the Census Bureau. To me, it just made sense to let them take out whatever they wanted based on my 1 exemption. I think most high school and college students working part-time should probably do the same, unless you’re really strapped for cash.

I did drop the ball though when it came to actually filing my taxes. I’ve used TaxACT the past 2 years with no problems. But this year I received a TurboTax CD in the mail and decided I’d try it out. I thought it’d be similar in cost to TaxACT. I was wrong. TurboTax charged $42 to prepare my state return plus another $20 to file it! Of course, I’d already filled out my entire federal return before I realized how much the state would cost. Compare that to TaxACT’s cost of $17.95 for both fed/state and e-filing. I will say TurboTax has a “nicer” interface and the questions seemed easier to understand than TaxACT’s. But I’m not sure it was worth a premium of $42!

Regardless of how you file your taxes, you definitely should, even if you don’t legally have to. Chances are good that you’ll get a refund.

I just got a 2% raise. So did you. Probably.

Thanks to those wonderful civil servants we elected, payroll taxes will be reduced by 2% in 2011. Specifically, the social security tax was reduced. Normally, you pay 6.2% on earnings up to $106,800. In 2011 though, we’ll be rocking a 4.2% rate. That’s money in yo pocket!

Since this is a going to be an “extra” amount every paycheck, I’m setting up a plan to make sure it gets used wisely and not dissolved into day to day spending.

Automate It!

I’ve been meaning to set up an automatic transfer from my checking to my “study-it-up-in-Europe” savings account. Now I’m going to take whatever amount I decide on and add on the 2% savings.

I estimate I’ll make around $2,600 from my part time job through July. (After that, I’ll be gearing up for my study abroad trip.) With the old rate, I’d be paying $161. But now, I’ll only pay $109 in social security taxes. A nice savings of $52.

Not gonna buy me a plane ticket, but every bit to pad the Euro account helps.

What are you doing with your 2%? Savin that difference or spending it like the world’s about to end? Let me know in the comments.

This is a post that I’ve wanted to write for a long long time. Time wise, it fits in well since the Bush tax cuts are set to expire at the end of 2010 unless congress extends them. My personal finance class is also covering a chapter on taxes this week.

Any discussion of taxes almost always involves politics of some sort. I’m going to do my best to just present the facts here, because so many people have no idea how taxes actually work and then have arguments with others over false information.

For federal taxes, the United States uses brackets. This means that different amounts of your income are taxed at different rates. Think of each bracket as a completely separate bucket of cash. Below is a table with the specific brackets for 2010. This type of system is referred to as a progressive tax – you pay more as you earn more.

As an example, we’ll do some simple math to figure out much someone, we’ll call her Katy, making $50,000 a year would pay in federal income taxes.

The first $8,375 is taxed at 10% – $837.50
Everything after $8,375 but not over $34,000 is taxed at 15% – $3843.75
Everything over $34,000 but not above $82,400 is taxed at 25% – $4,000

The total tax Katy pays is $8,681.25. Notice is that while this individual falls into the 25% tax bracket, the actual percentage of tax paid, or effective tax rate, is 17.4%. This is why you should always strive to earn as much money as possible, even if it pushes you into a higher bracket. You’ll only pay the higher rate on the increase in income.

It’s also important to note that my example here is based on taxable earned income. Someone who makes exactly 50 stacks a year will almost certainly end up being taxed on less than $50,000 thanks to things like retirement account contributions that reduce their taxable income.

Which brings me to my next point: Tax deductions and tax credits ARE NOT THE SAME THING. People always seem to mess this one up, and I agree, it can be a little confusing to keep straight. A tax deduction reduces the amount of income you are taxed on. Let’s say you donate $500 to a charity. You now do not have to pay taxes on that amount. You just reduced your taxable income.

A tax credit, on the other hand, reduces the actual amount of tax due. Using our example from above, we see that Katy owes Uncle Sam $8,681.25. But she actually bought a new energy efficient furnace that provides a $400 tax credit. Now the amount she owes is only $8.281.25.

I hope that clear things up. Taxes are a major part of personal finance and it pays to know what’s going on. After all, it’s your money!

I’ve been receiving a steady paycheck for about a month now. Every week, my earnings are directly deposited into my checking account. But I’ve noticed that someone (or something) is stealing a bunch of my cash before it gets deposited.

The nerve!

As you can see in the scan below, FICA is taking a decent amount of money from me every single week.

I’ve blurred my city to keep the Internet predators away…

I’m not a fan of people taking my money, so I started an investigation. Thanks to the Internets, more specifically – Wikipedia, I discovered that FICA is actually an alias of Uncle Sam – A.K.A the Federal Government.

It turns out that FICA stands for Federal Insurance Contribution Act. This act allows for a tax to be levied in order to pay for Social Security and Medicare. Some people argue that it’s not really a tax because you get your contributions back when you start collecting benefits. Whether or not you agree with this assessment is another topic completely…

Here are some quick facts and figures related to Social Security, Medicare, and FICA:

• Accounts for 37% of government spending
• Estimated to keep 40% of Americans over the age of 65 out of poverty
• FICA is calculated as 6.2% of your earnings, up to $106,800. This means that anything you earn over that ceiling is not subject to FICA

My Thoughts:

1. While 37% is a large chunk, I think it’s appropriate to spend a lot of money to keep the elderly from being stuck on the street and without medical care. Honestly, I think the priorities for government spending should be (in no specific order), health care, education, defense, and awesome stuff. Awesome stuff includes NASA, high way system, high speed Internet, etc. I do think we spend a tad too much on defense though. Just a thought….

2. I can’t believe that so many people are completely dependent on Social Security. I mean, I’ve always viewed SS as simply being one part of a retirement plan. Really, I think of it as a bonus because I have a strong feeling that the whole FICA, SS, and Medicare mess will go through a huge overhaul in the coming decades. Personal responsibility plays a hand in this too. Everyone should be saving something in a retirement account.

3. Just thinking out loud here, but would raising (or gasp, eliminating!) this cap help solve the budget crisis? I honestly don’t know and I’m not an economist so I can’t say with any certainty, but maybe we should look at the possibility. Perhaps eliminating it would allow for a true national health care system where everyone was covered? I know, I know – the horror. What would it be like to not have to worry about health insurance companies denying claims or being able to quit your job and start a business without the lack of health insurance benefits holding you back?

How do you feel about FICA? Friend, Acquaintance, or Foe?

If you held a job during 2009 and received a funny looking piece of paper in the mail called a “W2″, you might just be able to get some money back from Uncle Sam. All you have to do is…file your taxes.

I know, it sounds scary. Taxes are something adults do right? Adults with fancy careers. Adults who make tens of thousands of dollars every year.

Nonsense.

Just because you’re a student or don’t make much money doesn’t mean you can’t get a tax refund.

According to this article from the Internal Revenue Service (they’re the people who take collect your money), if you made less than $57,000 during 2009 you can file your taxes for free. Even if you don’t have to file taxes because your income in low, it’s still not a bad idea because once you have a tax return, you can open a Roth IRA.

All you have to do is go this website. Once there, click either “I Will Choose a Free File Company” or “Choose Free File Fillable Forms” (try saying that 5 times fast!)

Click to enlarge

If you select “Choose Free File Fillable Forms” then the IRS will allow you to select a tax form to fill out and you’re basically responsible for knowing what you’re doing. It’s not exactly hard, but I like having a computer double check my work, so I click “I Will Choose a Free File Company”. Once you’re on that page, you’ll be given a list of a dozen or so companies who can do your taxes.

I used TaxACT last year and this year and haven’t had any problems. I’m guessing H&R Block would be a good choice also. TurboTax also allows you to file your federal taxes for free. I noticed this year that the IRS says you can use TaxAct if “you are between 19 and 55 years old”. I don’t know why they say this because I’m definitely not 19 and I’ve never had a single problem.

For TaxACT, you go to their website, www.taxact.com, and sign up with your email address. It’s pretty obvious where to click:

Simply sign up for an account (it’s completely free) and start filing your taxes. The website guides you through everything you need to know. If there something you don’t understand, you can probably just ignore it. A lot of the questions apply to people with kids or individuals with complicated tax situations, so just click “next” without filling in any numbers or “skip”. Mainly, you just need to input numbers from the W2 sheet you received in the mail.

It’ll probably only take you about 30 minutes to complete the forms. Once you’re done, you can go ahead and submit your taxes to the IRS! If you fill in your bank account information for your refund, you’ll get money faster than if you elect to receive a paper check.

Once I got my first “real” job, (meaning not a lemonade stand on a random sidewalk) I eagerly awaited my first paycheck.

Finally, payday arrived. I quickly tore open the envelope and scanned to see how much money I made. Satisfied at the thought of serious cash, I made a deposit to my checking account

But there was a lot more in that envelope than I first realized. My pay-stub (the paper that’s attached to the actual check) had lines and lines of numbers and all sorts of information. Some of it made sense, some of it didn’t, but I was really only concerned with whether I got my money or not.

But after a while, I realized that it’d be a good idea to understand what money I wasn’t receiving, not just how much I made.

Taxes:

Since I’m 17, I figured that the government didn’t give a shit about my money. But I guess they figured out that my money spends just like everyone else’s and so they take some of my money for taxes. Yes, taxes, as in more than one. There are actually different types of taxes. You will most likely see the following kinds of listed:

SOC (might be called OASDI) is payment into the Social Security System. This is a public insurance program that actually includes many different services. These include:

• unemployment benefits
• Medicaid
• Medicare
• supplemental security income
• health insurance for children

This tax is how welfare is made possible. Also, when you retire and get “old” at 65, you can receive payments every month from the government as part of your retirement.

FEDWI- Stands for Federal Withholding. These are simply taxes paid to the federal government. This money could go to a number of different places-defense, highways, etc.

STATE-  (My paystub says “OH”, yours will obviously be different if you don’t live/work in Ohio.) These are taxes paid to the state. These are used for things like roads, state parks, state police, etc. Some states do not have an income tax.

CITY- I don’t pay city taxes since I work at a shopping mall in the country, but I have a friend who works in the city, and her paycheck has another line that reads “CITY” and a few more dollars are taken out for city taxes. Her place of work is actually only a mile or two from mine, so I just barely escaped them.

The good news that you can get part of these taxes back. If you earn less than a certain amount (around $8,000), the government will refund you the money taken for federal taxes for free.

These are the main types of deductions that could affect how much money you actually get to take home. There are other possible reasons why you might receive less money than you planned, but if you’re just working a simple part time job, these are the ones you should pay attention to.