Estimating your tax burden isn’t very difficult, especially if you take the standard deduction. The first step is to calculate your taxable income:
Taxable Income = Salary – Standard Deduction – 401(k) – Health Insurance
For a single person the standard deduction is $12,000 and for married people filing together this is $24,000. Let’s assume we are married (congrats!) and use our budget from earlier, the taxable income is
$72,000-$24,000-$7,200-$1,200 = $39,600
Payroll taxes for Social Security and Medicare (FICA on your paystub) are calculated based on your pay regardless of any 401k contribution. I know. The 401k is only sort of deductible. This is why on your W2 at the end of the year there is a different amount for Wages (Box 1), Social Security Wages (Box 3), and Medicare Wages (Box 5). Really annoying. Typically employers will report your wages on your W2 at the end of the year already taking out health insurance premiums you have paid, so
Payroll Taxes = 7.65% x (Salary – Health Insurance)
For our example, this is
Payroll Taxes = 0.0765 ($72,000– $1,200) = $5,416
One more caveat, if you make over the social security limit ($128,400 in 2018 and if you make more than this, good for you) the social security taxes are capped, you don’t pay any more than 6.2% of $128,400 ($7960.80). So for a person making $128,400 or more, the payroll taxes are
Payroll Taxes = $7960.80 + 0.0145 (Salary – Health Insurance)
Sorry, I started this whole post saying how the taxes were simple, and just hit you with a bunch of ridiculous rules. Blame Congress.
State taxes vary by state–duh–but let’s just estimate 5% of taxable income. You should estimate this based on your state, but most states are something around this, unless you’re in California, in which case, sorry, that perfect weather doesn’t come cheap
State taxes = ~5% x Taxable Income = 0.05($39,600) = $1,980
Federal taxes are based on a progressive system, and a lot of people don’t quite get this. The money you earn is taxed at different rates, and the more you earn, the higher the rate. People debate the merits of this, but I think this makes sense. $1000 has a very different value to a person making $20,000 a year (yay, we can pay our heating bill!) vs a person making $10 Million (lets gold-plate our bathroom faucet!). To account for this, the tax code is set up with different brackets, where the first few bucks you earned aren’t taxed very hard, but after you start earning a bunch more (the Government gets to decide what is a “bunch”) they crank up the rate. That doesn’t mean rich people pay a higher rate on all their income, just the higher income. For example, everybody (rich and not-so-rich) pays 10% on the first $19K of taxable income. The tax brackets are shown below
For our example, this would be
Federal Taxes = 10% x $19,050 + 12% x ($39,600-$19,050) = $4,371
If you have kids there is a nice credit of $2k per kid that you get to apply directly to this amount of tax owed, you get to take it right off the top. Though fair warning, if you have kids to save money, you’re in for a massive disappointment. There are other little deductions and credits too, but less common, as Homer Simpson pointed out:
Okay, Marge, if anyone asks: You require 24-hour nursing care, Lisa’s a clergyman, Maggie is seven people, and Bart was wounded in Vietnam
–Homer S.
In the end, we add them all up and we have $11,767 per year or $981 per month. In our budget example, I rounded up to $1000, maybe we’ll get a small refund?