Part 5: Taxes*
1. How can I get fewer taxes deducted?
To understand this question, you need to consider the way the government collects taxes from your paycheck. Your employer will “withhold” a certain amount of each paycheck as a prepayment for your estimated overall tax bill for the year. Your overall tax bill is determined by your income and the tax brackets established by the government. If the amount withheld from your paycheck during the year is more than the amount you owe at the end of the year, you get a refund. If the amount withheld is less than the total owed, you will need to pay when you file your taxes to make up the difference.
The only way you can lower your overall taxes for the year is to save money in a tax-deductible account (such as a 401k, traditional IRA, Health Savings Account, etc.). This will decrease your taxes by decreasing the amount that you claim as income for the year. However, with your 401k and a Traditional IRA, you will need to pay taxes when you withdraw money from these accounts (in retirement) so this is really only a way of deferring your tax bill until later in life.
To have fewer taxes withheld from each individual paycheck, you can adjust your withholding on your W-4 form (one of the documents you complete when you start a new job). You can claim certain withholding allowances on your W-4 to lower the amount your employer withholds from each paycheck, but keep in mind that if you lower your withholding too much, you might end up needing to pay when you file your taxes.
2. How much money is taken out of a person’s pay check and why?
With regard to taxes (ignoring voluntary deductions such as 401k, medical insurance, etc) there are three main items taken out of every paycheck: Income taxes (federal and possibly state and/or local), Social Security and Medicare. Social Security and Medicare taxes are taken out at a flat rate of 6.2% for Social Security and 1.45% for Medicare. These deductions will sometimes show up with acronyms such as FICA-OASDI or FICA-HI, or another similar acronym. Income taxes are withheld from your paycheck using a more complicated system involving either Tables of Withholding or the Wage Bracket Method, but the general rule is that the higher your paycheck, the higher the percentage that will be withheld. This is due to the progressive tax system in the US, where tax rates increase as your income increases.
3. Why are there still taxes taken out of a young adult’s (18 years and younger) paycheck?
There is no lower age limit for paying taxes, however, there are income limits that allow low income earners to avoid federal (and possibly state) income taxes. Everyone, regardless of age, pays Social Security and Medicare taxes (mentioned in #45). Currently, if you make less than $9,350 (the combination of the Standard Deduction and Personal Exemption) you will owe no federal income taxes for the year and do not need to file a federal tax return. However, if you have had taxes withheld from your paycheck during the year, you may need to file in order to receive your refund. These rules get more complex if you are claimed as a dependent on your parents’ taxes.
4. Why are taxes still taken out after the W2 form was filled out when I said not to take out any taxes?
(Note, Form W-2 is a tax reporting form that is sent from your employer to you every year around January, saying how much you earned and how much was withheld in taxes during the past year. Form W-4 is the information form you fill out when applying for a new job.) Filling out your W-4 form allows you to claim certain withholding allowances (as mentioned in #44) which will increase or decrease the amount of taxes withheld from your paycheck, but will not fully eliminate your tax withholding. Also, regardless of the number of allowances you claim, everyone pays Social Security and Medicare tax (7.65% of income).
5. What taxes come out of a paycheck?
See #2
6. Why are different amounts of money taken out if it is a big check or a small one?
See #2
7. What taxes come out of a paycheck?
See #2
8. Do the taxes being taken out of our paychecks help the government? Where does it go?
All taxes taken out of your paycheck (less any amount refunded to you when you file your tax return) are collected by the government. The government uses this money to provide many programs and services, ranging from maintaining an active military, funding public education and building and repairing roads and bridges. The federal government is responsible for certain programs and services, which are different than the programs and services provided by states, cities and local governments. Also, keep in mind that the taxes taken out of your paycheck are not the only taxes used by the government to fund these programs. Property taxes on real estate, sales taxes and corporate taxes are also used to support government budgets.
9. Why does the city get to take out taxes?
See #8. The city will have certain programs and services it provides to citizens that are not covered by the federal budget. These programs are partially paid for using payroll taxes.
*Many thanks for Justin for answering the questions on taxes :)
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