Personal Income Taxes Before 2018 Tax Changes
Lets take a look at our Personal Income Taxes a little Closer
You may be one of those people that simply fills out your W-4 (your tax withholding form) when you start your new job and then forget about it. This to me is a big mistake. Your income changes annually and there are many different life events that will affect your tax situation. I can only comment on situations for which I myself have encountered, which is single filing and married joint filing of taxes. I have no experience with and can't offer any advice on business taxes or self-employment. I have read many books in the Rich Dad Poor Dad series however that do clearly show there are large tax advantages to having a business and doing things financially through your business since they are taxed differently. The one thing that stuck out to me was the fact that businesses are taxed after expenses are taken out. For an everyday family that would be like being taxed on only the money you have left after paying for your home, food, utilities, etc. Wouldn't that be great?
Lets take a look at our current federal tax brackets for 2017. Keep in mind these are called "Marginal Tax Rates". This doesn't mean that if your total income falls in the 25% tax rate category that every dollar is taxed at 25%. If you need information on the upper brackets of 35% and 39.6%, you can find that on Nerdwallet.com where I got all of these numbers. Its also a great website to search for the best credit card offers, but that is a whole other topic.
Tax Rate Taxable Income Bracket Tax Owed
10% $0 - $9325 10% of income
25% $37,950 - $91,900 $5226.25 plus 25% of income over $37,950
28% $91,900 - $191,650 $18,713.75 plus 28% of income over $91,900
33% $191,650 - $416,700 $46,643.75 plus 33% of income over $191,900
Married Filing Jointly / Qualifying Widow(er)
Tax Rate Taxable Income Bracket Tax Owed
10% $0 - $18650 10% of income
15% $18,651 - $75,900 $1865 plus 15% of income over $18,650
25% $75,900 - $153,100 $10,452.50 plus 25% of income over $75,900
28% $153,101 - $233,350 $29,752.50 plus 28% of income over $153,100
33% $233,350 - $416,700 $52,222.50 plus 33% of income over $233,350
I like these brackets, because they break it down for you on the right side showing the tax owed. For example lets say you make $150,000 as a married couples filing jointly. Your total tax owed before deductions and exemptions would be $10,452.50 + $18,525 =$28,977.50 ($150,000-$75,900 = $74,100), $74,100 x 0.25 = $18,525
There are a number of tax deductions, exemptions & credits that will affect your tax return. What we should all really be aiming for is for your taxes owed or tax return to be as close to zero as possible. This would mean you are getting paid every last dollar owed to you throughout the year instead of having the government hold your money all year in order to give it back to you in one large sum the following year. I know some people love having that big check every year, but think about what you could have done with it throughout the year instead that could have changed your financial situation.
I’m going to give a couple of relatively simple examples of tax situations. These will use the state of MN as that is the only state I’m familiar with income taxes for.
MN income tax brackets are as follows for 2017:
Married joint filing
Tax rate Taxable income bracket Tax owed
5.35% 0 - $37,110 5.35% of income
7.05% $37,111 - $147,450 $1985.39 + 7.05% of income over $37,110
7.85% $147,451 - $261,510 $9764.36 + 7.85% of income over $147,450
9.85% $261,511 and over. $18,718.07 + 9.85% of income over $261,510
MN single filing
Tax rate Taxable income bracket Tax owed
5.35% 0 - $25,390 5.35% of income
7.05% $25,391 - $83,400 $1358.37 + 7.05% of income over $25,390
7.85% $83,401 - $156,900 $5448.07 + 7.85% of income over $83,400
9.85% $156,901 and over $11,217.82 + 9.85% of income over $156,900
EXAMPLE #1 Married couple with 2 children filing jointly with income of $150,000
We’re going to just make some estimates for their numbers.
* Save 10% in 401k ($15,000)
* $5000 pretax dependent care account
* $2000 pretax flex spending account
* $6500 annually pretax for health insurance
* $600 annually pretax for dental insurance
Total pre-tax (tax exempt income) = $29,100
AGI (adjusted gross income) = $150,000 - $29,100 = $120,900
* Property Taxes of $4000
* Mortgage interest of $6750
* Charitable giving/donations of $1500
* Car tab taxes of $325
* MN tax paid (state income tax) some states don’t have income tax, instead use sales tax
In this example their state income tax should be $7692.58
($1985.39 + $5907.19 = $7892.58) - $200 marriage credit = $7692.58
Total Deductions = $20,267.58
Personal Exemptions = $4050 x 4 people = $16,200
Taxable Income = AGI - Exemptions and Deductions.
$120,900 - $20,267.58 - $16,200 = $84,432.42
Federal Tax: $84,432.42 - $75,900 = $8532.42 x 0.25 = $2133 + $10,452.50 = $12,585
This family's tax rate for the year would be $12,585/$120,900 = 10.41%
Their MN state tax rate for 2017 would be $7692.58/$120,900 = 6.37%
I personally round up and do a little extra percentage, just in case of any miscalculations or changes. I'd put 10.75% or 11% for whole number for federal and 6.6% for state or 7% if needs to be whole number.
*Some employers like my own allow you to put in a specific percentage you want taken out for each federal and state taxes. Others may have to be whole numbers. If they don't allow specific percentages, then you may need to play around with exemptions claimed on your W-4 and you can add additional dollar amounts to be taken out per pay period as well if you are not having enough taxes taken out of your checks.
EXAMPLE #2 Single person, renting home/apartment. (I won't get into rent paid refunds)
In this example the person makes $60,000
* Saves 10% in 401k ($6000)
* $500 Flex Spending Account
* $1100 Medical Insurance annually
* $150 Dental Insurance annually
Total Pre-Tax (tax exempt income) = $7750
AGI = $52,250
Standard Deduction of $6350 for single filer
$4050 personal exemption
Total Taxable Income = $52,250 - $6350 - $4050 = $41,850
Federal Tax: $41,850 - $37,950 = $3900 x 0.25 = $975 + $5226.25 = $6201.25
Their actual federal tax rate for the year would be $6201.25/$52,250 = 11.9%
MN State Tax: $52,250 - $25,391 = $26,860 x 0.0705 = $1893.63 + $1358.37 = $3252
Their actual MN state tax rate for the year would be $3252/$52,250 = 6.22%
In this case you may want to set your tax withholding to be 12% or 12.25% to be safe for federal and 6.3 or 6.5% for state to be safe and make sure you won't owe money at the end of the year. Again, if you are only allowed whole percentages, then just round up to the nearest percent so could still do 12% or 13% for federal and 7% for state.
This is my 3rd year of trying to fine tune our exact tax rate as close to optimal as possible. Using these calculations, I'm very confident we shouldn't receive a huge refund come tax season, but we also will not owe any additional tax.
I believe most people's taxes are relatively simple enough for you to do yourself. I've used Turbotax.com, Taxact.com and H&R Block More Zero to file taxes in the past. Right now my preference is H&R Block. They are all easy to use and walk you through the entire process getting you as many deductions and credits based on how you answer certain questions. I've gone through the whole process using all of these websites in the same year and got the same numbers in the end, so there is no difference in outcome. This past tax season was when I first discovered HR Block More Zero and I thought it was too good to be true. I was able to e-file both our itemized federal return and state returns for FREE! The same thing would have cost me $50 through TaxAct. The H&R Block website wasn't as easy to use, but not too difficult either. Check it out yourself next tax season. You may be pleasantly surprised.
Here is just a simple and quick example of how having closer to your actual tax rate taken from your paychecks would benefit you more than getting a larger refund come tax time.Lets say you are going to receive a tax refund of $1000 for example. In this example the person may want to just use that to pay off a credit card debt with lets say an initial balance on it of $1000. So you make a one-time lump sum payment of $1000 on your credit card in February (which is likely the earliest you'd be receiving your refund). If you made the initial charge the January before that, its 12 months of interest accruing and we're assuming just minimum payments are made each month in this example. If you pay a $20 minimum each month over 12 months you would have accrued around $115 in interest before paying off your initial $1000 debt. If you planned your tax withholding's correctly, you would be able to put an additional $83 toward your debt each month reducing your debt to zero in 11 months, and only paying a total of about $57 in interest. That saves you half the amount in interest ($58) if you pay more each month vs. waiting until the "big refund" to make a large payment.
Thanks for reading and I hope this has been informative and helpful to you. Feel free to write me and questions or comments. Maybe you have a different method or have a suggestion to increase accuracy of my calculations.