Spending Plan (Part 2)
In Part 1, we talked about an accurate way to calculate what was actually coming in. Lets go through this with some numbers. The hypothetical person is single and makes $50,000 a year. He elects to take the health care deductions and 10% 401k contribution. Use the table to follow along the example.
| Marginal Rate | 25.00% | 9.30% | 6.20% | 1.45% | 1.08% | |||
| % of | ||||||||
| Gross | Fed | State | SS | Medi | CaSDI | Net | Net Salary | |
| Salary | 50,000 | (7,115) | (2,295) | (3,100) | (725) | (540) | 36,225 | |
| Health Care Premium | (576) | 144 | 54 | 36 | 8 | 6 | (328) | 0.91% |
| Health Care Reimbursement | (140) | 35 | 13 | 9 | 2 | 2 | (80) | 0.22% |
| 401k Contribution | (5,000) | 1,250 | 465 | 0 | 0 | 0 | (3,285) | 9.07% |
| Salary After Deductions | 44,284 | (5,686) | (1,763) | (3,056) | (715) | (532) | 32,532 | |
Salary
To calculate the federal and state taxes, it is exactly like doing your tax return. For CA state, I used 2004 numbers. I couldnt find the 2005 tax table at the time.
| Salary | 50,000 |
| Federal Personal Exemption | (3,200) |
| Federal Standard Deduction | (5,000) |
| Taxable Income | 41,800 |
| $0 - $7,300 is at 10% | (730) |
| $7,301 - $29,700 is at 15% | (3,360) |
| $29,701 - $71,950 is at 25% | (3,025) |
| Federal Tax Due | (7,115) |
Social Security, Medicare and CASDI taxes are calculate simply by taking the salary and multiplying by the corresponding rates (6.20%, 1.45% and 1.08%) respectively.
Health Care Deductions
To calculate the various taxes, take the deduction amount and multiply by the respective marginal tax rates.
401k Contribution
To calculate the various taxes, take the contribution amount and again multiply by the respective marginal tax rates. Notice that there is no Social Security, Medicare and CASDI tax savings for this deduction.
Analysis
The average tax rate is 13,775 divided by 50,000 or about 27.5%.
The marginal tax rate #1 is 25% + 9.3% + 6.2% + 1.45% + 1.08 or about 43%.
The marginal tax rate #2 is 25% + 9.3% or about 34.3%.
The reason for two different rates is that some deductions allow you to save on the payroll taxes (Social Security, Medicare, CASDI). Examples would be health insurance premiums, health care deferrals and dependent care deferrals.
Take a look at the 401k contribution line. Notice that with a 10% gross contribution, it is costing him only about 9% of his take-home pay.
This post has 2 comments. Read and share your opinions.
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>>> Jeremy Commented on July 08, 2005
I may be confused but wouldn't you take your Fed deductions on your taxable income after you 401K and health deductions, rather than from the full 50,000? Wouldn't you have $36,084 of taxable income. That would leave you with $5626 of fed tax due.
>>> Prospect Commented on July 10, 2005
Yes, I would pay taxes on the gross income less deductions. The table shows how taxes effect each item. Notice that the federal taxes due is $5686.
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