I’ll remember it always. I was seventeen, a junior in high school and had just gotten my first job. My first job launched my career in the non-profit sector, but at the time, it was just something to do after school. My family life wasn’t the best, and I didn’t want to go home. My first day of work was on February 1st which meant the pay cycle ended on February 12th to cut our checks for February 15th. My check would be on the shorter side since I hadn’t worked a full two weeks, but I was still okay with it. I ran numbers with my calculator and couldn’t wait to deposit it in my new savings account I had opened up.
My face fell from shock when I realized I was missing 20% of it. “Where did it go?” I frantically asked my aunt I was living with at the time. How did seem half of my paycheck was missing before I could even cash it? My aunt laughed at me and explained the new grown up concept of taxes.
Taxes are what keeps our nation and state a well-oiled machine. Taxes help pay for libraries, the roads you drive on and police officers that keep you safe at night. While you may not agree with everything your tax dollars go for, you still have to pay them if you work in the United States and just about anywhere else. And while a certain percentage of your hard earned dollars may be missing every month, it keeps our society running.
How much do you pay?
After you accept a job offer, you will be asked to fill out new hire paperwork. Part of this paperwork is called a W-2, which is a tax withholding form. You can select how much the government can take out of your paycheck to go towards taxes. The more dependents you claim, the less will be taken out. Before you decide to say none and claim a bunch of phantom dependents, know that the government will still tax you according to your income level. So, if you are not paying now, you will be paying later. So make sure you are filing correctly, so you do not owe when you file your income taxes.
To figure out your tax rate, or a rough estimate, you can use an online tax calculator. Tax Act has this nifty one that allows you to run various scenarios to see where you stand. A good rule of thumb is to use the single status, especially if you are not married and go off your max income predictions. I suggest your max income predictions because I always consider that I may earn more throughout the year and would rather be safe than sorry with taxes.
Another thing to consider is if you pay state taxes. When I lived in Nevada, I did not pay state taxes due to the massive gambling industry. I live in Arizona now and have to pay an additional 3.2% of what I make to the state on top of federal taxes. Every state is different so pay attention when filing.
Where does my tax money even go?
Your tax money goes towards a variety of different things depending on what country you live. In the United States, your taxes go towards the following:
- Social Security – Initially passed by Franklin D Roosevelt, Social Security is a public program that provides retired workers benefits and income after they have reached age sixty-seven. In decades prior, you did not have to be sixty-seven to collect social security, but modern medicine has made our average life spans longer. Everyone, including you, is eligible and entitled to social security unless you do not pay in. Some government employees choose to seek state pensions instead.
- Medicare & HealthCare Subsidies – Medicare or Medicaid is health insurance for those who are sixty-five and older as well as people who have disabilities. Only individuals who can show verification are eligible for this benefit from the government. Health care subsidies are now included in this tax thanks to the Affordable Health Care Act passed in 2012 by President Obama. However, subsidies may or may not go away due to current legislation and practices if passed.
- Defense – This is our military which is located both in our country and off seas. Defense spending is to support our troops and any other expenses we may occur during a time of war.
- Safety Net Programs – According to the Center on Budget and Policy Priorities, a fifth of your tax dollars goes towards safety net programs. Safety net programs are programs to help the greater good and those who need assistance due to economic circumstances. These are but not limited to programs such as WIC, TANF, and SNAP which is more commonly known as food stamps. Other programs that come out of this bucket are unemployment and government housing assistance. So while more of your taxes go towards defense and social security, a chunk of this goes towards it too. Unlike social security, you must meet a certain federal income guideline to qualify.
- Education – Public education including universities rely on tax funding to keep their doors open and all of the expenses that come with it. Teacher and administration salaries, food for students and building overhead are all paid for with your tax dollars.
- Corrections & Public Safety – Prisons, police, and fire departments are all paid for out of tax dollars. While housing inmates’ takes up significantly more money than running our police and fire departments, it is still all publically funded to keep our towns and cities safe.
- Transportation & Other – Last but not least, there is a chunk set aside for road infrastructures and other travel society may need. Taxes pay for roads, bridges, railroad tracks, etc. This is why you may or may not see road construction in your area from time to time, especially after bills or tax overrides pass. Along with transportation, government workers, libraries, parks and just about anything else for public use is paid for by taxes. There is also a small pot put towards arts and research.
What if I over pay?
If you over pay on your taxes, you will get what is known as a refund during income tax season. You must file every year with the government to let them know you paid your taxes. If you don’t, it will eventually catch up to you.
The IRS has the right to impose a levy on any financial asset you may have to collect their debt. They can garnish your wages or freeze your checking account. Although I have no real life experience with this, I watch it happened to my father. When my dad was younger and irresponsible, the IRS cleaned out his checking account weeks before Christmas.
Some people would rather owe at the end of tax season, and that is up to you. Personal finance means you must do what is best for your particular situation. But being in debt is not what is best, especially to the IRS.
Things to consider
- Pre-Tax Expenses – You are entitled to certain pre-tax benefits and expenditures. Health insurance, FSA and HAS spending and 401K contributions are allowed before taxes are applied. This makes your taxable income less which means you pay less in taxes. Look into all options and benefits to make sure you are contributing to your future and putting aside all money you can to invest in your health now instead of later. If you aren’t contributing to retirement yet and it is offered through your employer, jump on it! The sooner you start saving, the more interest you can collect.
- Write-Offs When Filing – Sometimes you may opt to pay less in taxes if you have what is commonly known as write-offs. Write-offs are deductions that the government will allow you to claim during income taxes to receive a partial refund of taxes owed. Education and health care are two write-offs that you are authorized to collect on. You cannot claim any medical expenses paid for with nontaxable income, such as anything covered in your FSA.
It’s easy to get caught up in owing the government money, but if you start off on the right foot financially, it’s even easier to stay ahead and out of trouble come income tax season. Pay your taxes early, often and on time!