Thursday, July 26, 2012

Let's talk about....

Taxes! *cringe* Don't worry, I'll keep it relevant and important. As boring and intimidating as the topic is, it is worth having a basic understand. After all, the only things certain in life are death and taxes! You don't need to know how to fill out your own tax return - hello, it's called Turbo Tax. But knowing and understanding some concepts can help you keep track of your money better.

You know how when you get paid, the pay stub shows the difference between what you actually made and what you are receiving? The difference is what the government has withheld from your paycheck. They withhold your money to make sure they get paid what they are owed. It's kind of nice for you too, because if they withhold enough you don't have to shell out a bunch of cash in April.

Whenever you start a job, you are asked to fill out a W-4. This form is how the government decides how much money they will take out of each paycheck you get. The W-4 has you specify how many "personal allowances" you need. This is based on if you're married, how many kids you have, etc. The theory is that when you have a spouse/kids you get a tax break and don't pay as much in taxes, therefore the government will withhold less from your paycheck. So, remember, the higher the number of allowances you take, the less money they will take out. If you don't take any allowance, BAM, they will take as much as they can.

Now, of course, if they take out too much money it gets returned to you. How many times do we get a huge tax return because they took more money from our paycheck than we actually owed? Maybe you like getting a tax return, it's kind of fun, like a little present. But remember - that money is your money. You just loaned the government your money for free. Here Washington, just hold on to my money for a few months. Nah, don't pay me any interest on it, you can just hold it, thanks! Once they withhold it from your paycheck, you can't get it back until the year ends and you file your tax return. I don't know about you guys, but I have my own uses for my money.

For a lot of us, we don't even make enough money to owe taxes, so the government shouldn't be taking anything out. How do we make sure they don't withhold anything? By marking exempt on your W-4! They will still take out your social security taxes, those are unavoidable. But you will get to keep everything rather than having to wait a year to get it back!

How do you know if you will make enough money to pay taxes? There is a hurdle you have to pass before you will owe any taxes. This hurdle comes from the deductions the government allows you to take in calculating how much you owe in taxes. The first is the standard or itemized deduction. If you want to know more about the itemized deduction, ask and I'll explain, but it doesn't apply to most of us. The amount of your standard deduction depends on if you're single or married. Check out this sweet chart:

Filing status
YearSingleMarried Filing JointlyMarried Filing SeparatelyHead of householdQualifying Surviving Spouse
Then, if you are not being claimed as a dependent by someone else, you get what they call a personal exemption. For each member of your family; you get to deduct a certain amount. For 2012, that amount is $3,800.

You automatically get to deduct these amounts from your income, so if your deduction and exemptions are more than your income you won't owe any taxes.

So for Greg and I: we get a standard deduction of $11,900 and then two personal exemptions, or $3,800*2=$7,600. To owe any taxes, we would to earn more than $19,500 this year.

For a single person who is claimed as a dependent by their parents: you get the standard deduction of $5,950  but no personal exemption. You have to earn more than $5,950 this year to owe any taxes.

A single person who is not a dependent: you get the standard deduction of $5,950 and one personal exemption of $3,800. To owe any taxes, you need to earn $9,750

If you know you're not going to owe any taxes, don't give the government your money. I mean, unless you just really want to.

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