Paying your Federal Income Taxes:
The federal agency that oversees the collection of federal income taxes is the Internal Revenue Service (IRS)
Two basic ways you pay them - Your employer withholds taxes from each of your paychecks and sends the withholdings to the IRS - You file an Income Tax Return at the end of each calendar year -- due to the IRS by April 15th of the following year -- based mainly on the Wages and Tax info contained on the W-2 form provided to you by your employer (during January of the following year) -- shows how much you owe for the tax year and how much your employer withheld during the year --- if more was withheld than you owe, you’ll get a refund --- if less was withheld than you owe, you’ll have to send a check with the difference to the IRS as part of your Income Tax Return
Non-voluntary payroll deductions include:
FICA Taxes - Social Security (always 6.2% of gross pay) - Medicare (always 1.45% of gross pay)
Federal Income Tax Withheld (FITW) - Based on how many withholding allowances you claimed on the W-4 form you filled out for your employer -- the employer will withhold a lower amount of taxes (FITW) for each allowance you claim -- however, how much you owe in federal income taxes for the year has nothing to do with how many allowances you claimed on your W-4 - Employer uses charts in IRS Pub 15 to determine how much to withhold each paycheck
Federal Income Tax Brackets:
There are 7 tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and a new one for 2013 – 39.6%) in the U.S. Tax Code
We have a progressive tax system in which those that earn more money are expected to pay a larger percentage of their income for taxes as that income increases
Other tax systems, that we do NOT use, include: - proportional tax systems (aka flat tax): everyone pays the same percentage of their income (e.g. everyone pays 15% in taxes regardless of income) - regressive tax systems: smaller share of income is paid as income increases
Deductions on Your Federal Income Tax Return
Everyone is allowed to adjust their gross income by taking legal deductions. The more you can reduce your income through these legal deductions, the less taxes you will have to pay
Two options available: - Standard Deduction: was $6,100 for 2013 for single filers - Itemized Deductions: U.S. Tax Code includes numerous deductions that can legally lower your taxes. You have to list each of these individually on your tax return
Deduction Strategy: Use whichever option gives you the higher dollar amount to deduct (e.g. If I can only deduct $5,500 by itemizing, I’d choose to take the higher standard deduction) Credit:
For those who do not have credit, there are three basic ways to build it: - Try to get a store or gas credit card (these are usually easier to get than a major credit card such as Visa, MasterCard, or American Express) - Find someone with established credit to co-sign for you on a loan - Get a “secured credit card” from your bank
The latest major credit card legislation (passed in 2010) made it illegal for credit card companies to issue cards to anyone under the age of 21 without proof of the ability to pay their bills
Reporting Agencies (aka Credit Bureaus)
There are three: - Experian - Equifax - TransUnion
These agencies compile information provided to them by creditors
Each agency offers two products: - Credit Report: Very detailed report about your credit history -- Positive things will stay on the report indefinitely -- Other than bankruptcy, negative things (e.g. late payments) can only legally remain on your credit report for 7 years -- Bankruptcy will stay on your report for 10 years -- Requesting a copy of your own credit report, no matter how many times you ask for it, has NO NEGATIVE IMPACT on your credit score and is contained only on the credit report that you receive - Credit Score (aka FICO
