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Cash Flow and Budgeting 2 Continued…

Learn about the complexity of taxes and deductions and how they affect your paycheck. Explore common payroll and non-payroll tax deductions, tax credits, and personal exemptions. Fill out IRS forms to calculate federal and state withholdings.

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Cash Flow and Budgeting 2 Continued…

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  1. Cash Flow and Budgeting 2 Continued… The Complexity of Taxes and Deductions

  2. A Word on Taxes • On the paycheck stub in the next slide, you will notice that the Federal withholding is $38.00. • Taking the gross income amount and using the marginal tax rates, the Federal withholding would be $194.59. • That is a difference of $156.59. Why the difference?

  3. A Paycheck – Biweekly

  4. Tax Deductions • Tax Deductions lower the amount of money subject to taxation. The person who provided this pay stub has $253.27 in deductions per paycheck. • There are other deductions not included on a paycheck • Let’s look at some possible payroll and non-payroll tax deductions…

  5. Common Tax Deductions • Payroll • Health Insurance • Retirement Accounts • 401(k) 403(b) Pension • Non-Payroll • Charitable Giving • Mortgage Interest • Retirement Accounts (Traditional IRA) • Student Loan Interest (up to $2,500) • Child Care Expenses

  6. Common Tax Deductions Non-Payroll Continued… • Standard Deduction or Itemized Deduction • Medical Expenses • Property Taxes and more…

  7. Standard Deduction Amounts for 2013: Single: $6,100 Head of Household: $8,950 Married Filing Joint: $12,200 Married Filing Separately: $6,100 Qualifying Widow/Widower: $12,200 Dependent: $1,000-$6,100

  8. Tax Credits • What is a tax credit? A tax credit is a dollar-for-dollar reduction of the income tax you owe. In most cases, credits cover expenses you pay during the year and have requirements you must satisfy before you can claim them. Examples of tax credits:

  9. Tax Credits Examples of tax credits: • Earned income credit (EIC) • “Make Work Pay” credit • Lifetime learning credit • Saver’s tax credit • Child/dependent Care credit • Green energy tax credits

  10. Tax Credits Comparing credits to deductions • Tax credits generally save you more in taxes than deductions. • Deductions only reduce the amount of your income that is subject to tax, whereas, credits directly reduce your tax bill. Ex: suppose your taxable income is $50,000 and you have $10,000 in deductions, which reduces your taxable income to $40,000. If that $10,000 would have been taxed at a rate of 25 percent, then the deduction saves you $2,500 in tax. If the $10,000 was a tax credit instead of a deduction, your tax savings is $10,000 rather than $2,500

  11. Personal Exemptions • Personal Exemption – The dollar amount that each individual taxpayer is able to deduct for him or herself or a dependent each year. • Each personal exemption lowers the amount of taxable income by $3,900. • The number of personal exemptions is determined by the W-4 Worksheet • Let’s fill out a W-4 for our professions!

  12. W-4 and Personal Exemptions • W-4: IRS form that helps employers determine how much federal income tax to withhold • This form is filled out at the beginning of employment and can be changed at a later date • Once the number of exemptions are determined, an employer uses the IRS guidelines to determine the amount to withhold.

  13. Calculating Federal Withholding Using the pay stub provided: Wages Deductions _____ Taxable Wages Refer to the Tax Tables in IRS Pub. 15 (Provided) The person that provided this paystub is - Married Filing Jointly - Paid Bi-Weekly - Taking 3 Personal Exemptions

  14. Calculate Federal Withholding • Ex.) Calculate your Federal Withholding Tax of your profession. What you need to know… • Single • Paid Monthly • How many personal exemptions are you taking?

  15. Arizona Withholding • Form A-4 • Basically Arizona’s W-4 except you do not get any exemptions. Instead, you decide what tax rate you would like withheld from your income • Chose a percentage based your income • In the example pay stub, the person elected to have 2.7% withheld for Arizona taxes • A good rule of thumb: you should select the withholding rate that matches your maximum tax bracket. Example: If Rocco is making $39,000, he would elect to have 3.6% withheld.

  16. Homework # 2 • Consider your profession • Fill out the W-4 and determine the number of exemptions you will be able to claim • Use the Tax Tables provided in IRS Pub. 15 and calculate your Federal withholding • Fill out the A-4 and decide what percentage you what to withhold • Calculate your State withholding based on your decision • Update your Monthly Net Income • Update your paycheck stub

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