Stop the Madness
By: Katy L. Chase, CFP ®
March Madness is usually about college basketball games or more importantly, the bracket you filled out to predict the overall wining team.
I like to think of March Madness in another context: the current state of madness in regards to money. If you work full-time, odds are you spend the majority of your life at work. You work hard for the money you make to support your family, so let’ s stop the madness of not understanding where the money goes on each of those paycheck line items.
WHERE DOES YOUR MONEY GO?
This can be a prickly subject for some people, so let’ s stick to the most common paycheck taxes and deductions that will be relevant for the majority of people.
Common Taxes
Federal Tax Withholding- the amount of money withheld from your gross income. The percentage of Federal income tax withheld can depend on either what income tax bracket you are in or how much you have specifically requested to be withheld based on your household earnings and previous year earnings.
State Income Tax Withholding- the amount of money withheld from your gross income. The percentage of State income tax withheld oftentimes depends on what state you live in. Maryland’ s 2016 – 2017 tax year income tax rates start at 2 % on the first $ 1,000 of income and increases based on the amount of income you earn. The max rate is 5.75 % on a portion of your income if you earn over $ 250,000.
Many people are subject to a local tax subject to the county you live in. While you may not see it reflected on your paystub, you will see this tax reflected in your tax returns. However, don’ t forget to add on top of the max 5.75 % the local tax on income – in Frederick County the local tax is 2.96.
Social Security Tax- the amount of taxes withheld and contributed to the fund that pays retirement, survivor, and disability monthly benefits. Generally speaking, this makes up about 6.2 % of income up to $ 127,200. That means, if you make $ 135,000, you pay the 6.2 % on the first $ 127,200 you earn and don’ t pay 6.2 % on the remaining $ 7,800.
Medicare Tax- the amount of taxes withheld and contributed to the Medicare fund which generally provides medical benefits for Americans over the age of 65. Generally speaking, this makes up about 1.45 % of your income with no income limit.
Common Deductions
Life Insurance Premium- typically included if an employee wants to add additional life insurance through her group term life insurance policy either as an individual, or to add a spouse or dependents coverage, or both.
Long-term Disability Premium- applied if an employee purchases long-term disability coverage through work. Employees can be covered for short-term and long-term disability through their employer. Whether or not it shows up as a deduction on your paystub can depend on if you have decided to purchase additional coverage( beyond what your employer provides) or if you pay the premium out-of-pocket up front.
Retirement Plan Contribution – applied if you actively contribute to your employer-sponsored retirement plan such as a 403( b) or 401( k). Generally, the only way to contribute to an employer-sponsored retirement plan is through paystub deductions which occur each pay period. Keep in mind if you are contributing the IRS maximum( for 2017 that is $ 18,000 for everyone and for those 50 years of age or older there is an allowed $ 6,000 catch-up contribution), your paystubs at the end of the year might not show this deduction if you have already hit the maximum contribution amount.
You work hard for you money- know where it is going. Make adjustments as needed and make sure to take advantage of the benefits your company offers, such as health care coverage, life / health / disability insurance, and retirement savings plans.
Make sure to talk with your tax advisor regarding the above as everyone’ s situation is different.
Securities offered through First Allied Securities, Inc. Member FINRA / SIPC. Advisory services offered through Lighthouse Wealth Management, a registered investment advisor not affiliated with First Allied Securities Inc.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
LakeTalk March 2017 31