Category: taxes

Tax Planning by Saving More

Tax Planning by Saving More

In the last post, we figured out how to calculate our tax bill with the new tax brackets. We found out Single Sam who makes $40,000 is going to save $31 every other week in taxes thanks to the new brackets. He is going to be smart and save that money or pay it toward any debts he has. The problem is that right now Sam isn’t saving for retirement and you might not be either. But you should. The younger you are, the more your money will grow and compound over time. That means you need to save today! Not 10 years from now.

This math can be explained here.

The second phase of tax planning is to move beyond just knowing how much you owe to controlling how much you owe. If you choose a retirement account that is tax-deferred then you don’t just get the benefit of a company match and the compound interest. Tax-deferred accounts mean you don’t have to pay taxes on the money until you actually retire, lowering your tax liability now. These tax-deferred accounts include 401(k)s, 403(b)s, 457(b)s, Traditional IRAs and other similar accounts. Contributions to pension plans also lower your taxable income, but if you’re like me, you’ve been contributing to that since day one and have no choice in the matter. These other retirement accounts have a lot of personal choice involved. You can choose how much you want to contribute each year up to the maximum, which is $18,500 this year, for those under 50.

When you contribute to a retirement account, this is considered an adjustment to your income. Every dollar you contribute is subtracted from your gross income when trying to calculate your taxable income. So let’s assume Sam starts off slowly but surely, and contributes $1000 to his employer’s 401(k) plan. Now when he calculates his taxes, his taxable income will be





$27,000 which we know will lead to a lower tax liability. Sam will owe

$3,050 in taxes. By contributing $1,000 to his retirement account, he lowered his tax burden by $120. This makes sense because $120 is 12% of $1000. So for every additional $1,000 that Sam contributes to retirement, it will lower his federal tax bill by $120.

And it won’t just lower his federal tax bill either, it will lower his state taxes as well. When we calculated state taxes, we saw that we used the federal AGI to begin the calculation. For Sam, his AGI is $40000-$1000=$39,000 in 2018. Last year, his AGI was $40,000. In Ohio, an AGI of $40,000 or less, allows you to claim a personal exemption worth $2,300. This would make Sam’s taxable income $37,700 and his state tax liability $773 last year, when he didn’t contribute to retirement. Now this year, his Ohio taxable income would be $36,700, making his Ohio tax liability $744. For every $1000 that Sam contributes to retirement his Ohio tax liability will go down by around $29 or $30.

All of this saving is starting to be a lot to keep track of. In the table below, you will see that for every $1,000 saved in a pre-tax account, its implications for federal tax liability and state tax liability. The final column is the sum of the federal and state tax bills. The table goes up to $10,000 just so you get an idea of how much his tax bill could go down if Sam saved 25% of his income.

Dollars Saved Pretax Federal Taxable Income Federal Tax Liability Ohio Taxable Income Ohio Tax Owed Total Tax Bill
0 28000 3170 36700 773 3943
1000 27000 3050 35700 744 3794
2000 26000 2930 34700 713 3643
3000 25000 2810 33700 684 3494
4000 24000 2690 32700 654 3344
5000 23000 2570 31700 625 3195
6000 22000 2450 30700 595 3045
7000 21000 2330 29700 565 2895
8000 20000 2210 28700 536 2746
9000 19000 2090 27700 506 2596
10000 18000 1970 26700 476 2446
For gross income of $40,000


When Sam goes from saving nothing to saving $10,000, his total tax bill drops from $3943 to $2446, which is a savings of $1497. While he might have $10,000 in an account he cannot touch (maybe) until he is 59 1/2, he has reduced his yearly take home pay by only $8503.

Find Your Comfort Zone of Saving 

Many sources will tell you to save between 5% and 10% of your income. But the more you save now, the more your wealth will grow. Saving more provides security and options as you progress. I save 20% of my income in pre-tax accounts, and I am looking for ways to be able to increase that percentage.

When using tax planning as part of your personal finance strategy, a lot is going to be about your comfort. Start saving just a bit but then increase as you start to feel more comfortable with the idea. If you are in the 12% tax bracket and were to save $1000 in retirement, you’d reduce your yearly take home by $851 which would turn out to be less than $33 per pay check, if you are paid biweekly. Can you live with $33 less in your pay check? The answer is probably yes. So you can definitely contribute $1000 this year to retirement. Remember that in 10 years, that money will double. When you add more, there is more to double…

If you were to save $2000, your yearly take home would be reduced by $1700, which would be about $65.38 per paycheck you didn’t see. Can you do without $65 of spending every 2 weeks? If you saved $3000, you’d reduce your yearly take home pay by $2551, which would be about $98.12 less per paycheck. Can you do without $100 per pay check? If you saved $10,000, your yearly take home pay would be reduced by $8503, which would be about $327.04 less per pay check. Can you do without spending $327 per pay check? Probably not. Not right away. But you can do without $33; you have my complete vote of confidence. You can definitely start with saving $1000 right now, even if you make “only” $40,000. Work your way up to $10,000 as you earn and learn more.

Saving in pre-tax retirement can seem a little scary to some people because you can’t touch the money. But that’s not always the case and plus, you don’t really need it. Money is a tool often just for security purposes. You have money you’re putting aside for future use and it has this awesome benefit to you now. If you can reduce your take home pay by just a little bit, you can do a lot of good for yourself in the long run. Find your comfort zone of saving and just start. The tax benefit is worth it.

Tax Planning with the Tax Cuts and Jobs Act

Tax Planning with the Tax Cuts and Jobs Act

You’ve filed your 2017 tax returns and you feel great. You understand how your tax bill is calculated and it is no longer a mystery. Now it is time to start taking some control and planning for future tax filings. Tax planning is your next step and this year you get to double your fun! The tax brackets have changed, which I know you know. But do you know how it affects you personally?

At this moment, I am going to keep it simple to cover the average millennial I know (that is, not a home owner). In the future I will cover some more complex tax situations, like my own. For most of you, the Tax Cuts and Jobs Act will lower the amount you have to pay in federal taxes and below I show that calculation. This is good news. You need to go on to plan what you’ll do with that savings. Planning is key in controlling your finances. For the millennial homeowners, depending on your location, you might not benefit so much from the new tax laws. But we’ll dive into that later as it involves more cumbersome comparisons.

Recap: Calculating your federal taxes in 2017

Let’s recall Single Sam from the federal tax article. Sam grossed $40,000 and he had no adjustments to his income. He claimed the standard deduction worth $6,350 and the personal exemption worth $4,050. We calculated his taxable income to be





$29,600 which placed him in the 15% tax bracket.

Which yields a tax liability of about $3,974.

How to calculate your 2018 tax bill

Now, it’s time to look at our current year and calculate what Sam should owe over the course of the year. Of course Sam could earn additional income or encounter an unfortunate time and earn less. But let’s assume that doesn’t happen and he doesn’t get any raise. Sam projects that he will still gross $40,000 and he hasn’t wised up and started contributing to any retirement fund. How much will Sam have to pay the federal government in 2018?

For Sam, the only changes that matter is that the standard deduction nearly doubles and the personal exemption is gone. Sam will claim a standard deduction worth $12,000 and that is all he needs to know to calculate his taxable income. And his tax bracket changes because they were all reorganized. Sam’s taxable income is




$28,000 which is lower than it was last year by $1,600. We can already see that the change to no exemption but the higher standard deduction works in Sam’s favor. It lowers his taxable income. Because the tax brackets have changed, Sam gets an additional perk in his taxes. Since Sam’s taxable income is $28,000, he looks in the table and sees that he is in the second row.

Rate Taxable Income Tax owed
10% $0 to $9,525 10% of taxable income
12% $9,525 to $82,500 $952.50 plus 12% of the excess over $9,525
22% $38,700 to $157,500 $4,453.50 plus 22% of the excess over $82,500
32% $157,500 to  $200,000 $32,089.50 plus 32% of the excess over $157,500
35% $200,000 to $500,000 $45,689.50 plus 35% of the excess over $200,000
37% $500,000 + $150,689.50 plus 37% of the excess over $500,000


In the past, Sam was in the 15% tax bracket and now he is in the very near by 12% tax bracket. The calculation process stays the same. He will break his income into $9525 and the excess. Then he will calculate 12% on the excess and add it to $952.50

For 2018, Sam will owe $3170 in federal taxes. Compared to 2017, he owes $804 less. That’s $804 in Sam’s pockets instead of the federal government’s. If Sam gets paid biweekly, that’s just under $31 extra dollars per paycheck. Not bad. If Sam is smart with his money, he will take that extra $31 per check, or $62 per month and pay down debt or build up his savings somehow.

In the next article we are going to figure out how Sam can save even more money on taxes by planning for his future and taking advantage of the tax code.



Tax Time: Calculate Your Own (State) Taxes

Tax Time: Calculate Your Own (State) Taxes

Now that you have calculated your federal tax bill, you can move on to calculating your state tax bill. Since I live in the state of Ohio, my example is going to use Ohio tax taw. You’ll need to reference your own state’s tax laws to be able to do this.


Begin with your Federal AGI 

In my previous post about federal taxes, we calculated my Adjusted Gross Income, which is needed to begin your state taxes. My AGI was $46,487. The next step would be to calculate my Ohio AGI by subtracting any deductions I qualify for. I don’t actually qualify for any deductions, but the different deductions are listed here in the Ohio Schedule A form. My sense is that most millennials are not going to be deducting much. If you use a tax software they will take you through the questions needed to find out. Medical expenses and contributions to an 529 college account would be the common deductions.

My Ohio AGI is also $46,487. My next step is to subtract off the value for my personal exemption which, according to this table, is $2,050.





Identify your Ohio tax bracket and calculate

My Ohio taxable income is $44,437 so I will use this number to calculate my taxes owed to the state of Ohio. I will use a tax bracket table very similar to the Federal tax bracket tables. I look at the table below and find I am in row 5.

For taxable years beginning in 2017:

Ohio Taxable Income Tax Calculation
0 – $10,650 0.000%
$10,651 – $16,000 $79.08 + 1.980% of excess over $10,650
$16,000 – $21,350 $185.01 + 2.476% of excess over $16,000
$21,350 – $42,650 $317.48 + 2.969% of excess over $21,350
$42,650 – $85,300 $949.88 + 3.465% of excess over $42,650
$85,300 – $106,650 $2,427.70 + 3.960% of excess over $85,300
$106,650 – $213,350 $3,273.16 + 4.597% of excess over $106,650
More than $213,350 $8,178.16 + 4.997% of excess over $213,350


I need to take $44,437 and find the excess over $42,650 and calculate the taxes owed.

Just like in federal taxes, the Ohio government likes whole numbers and there is some rounding throughout the calculation. My actual state tax owed this year was $1011. Since I paid in $1262 throughout the year in paycheck with holdings, I am owed a refund.




My refund is $251 this year. As soon as I receive this in my checking account, I will transfer it to my Roth IRA and invest it for my future retirement.


Remember that the point of calculating your own taxes is so that you can start predicting taxes for different situations. If I save a certain amount more in retirement, how will that affect my tax bill? What plans can I make for the refund I should receive? 

Tax Time: Calculate Your Own (Federal) Taxes

Tax Time: Calculate Your Own (Federal) Taxes

So you’re ready to learn how to calculate your own taxes? You need to know a few things first: your gross income, any adjustments and deductions you have, and any credits you qualify for. In this post, you’ll learn exactly how to calculate your AGI (adjusted gross income), your taxable in come, and your tax bill using a tax bracket table. This post is about calculating your tax bill NOT how to do your taxes. Doing your taxes involves filling out the form and you can do this through a software like Turbo Tax or (I’ve used both).

Knowing how to calculate your taxes gives you ownership over this bill you have to pay every year. It is also the first step in being able to do advanced financial planning for yourself as taxes are always a consideration in any plan you make. By November, you want to be able to calculate your tax bill due the following April so you can make any adjustments you want or need. For example, you may choose to increase your 401(k) contributions for the rest of the year in order to reduce your tax bill because you earned a bonus.

Example 01: The Simplest Case 

The most straightforward case a person could be is a single individual who doesn’t own a home and doesn’t contribute to any retirement plan. This person does not have any student loans and qualifies for no tax credits.

Assume Single Sam grossed $40,000 this year. Single Sam will take the standard deduction because he does not own a business or make charitable contributions. Sam has no reason to itemize his deductions. The Standard Deduction is worth $6350 for tax year 2017. Sam also qualifies for the Personal Exemption* which is worth $4050 in 2017. Sam will subtract these two values from his gross income.





Single Sam determines his taxable income to be $29,600. Now he will go to the IRS published tax bracket table to find where he falls.

Rate Taxable Income Bracket Tax Owed


$0 to $9,325 10% of Taxable Income


$9,325 to $37,950 $932.50 plus 15% of the excess over $9,325


$37,950 to $91,900 $5,226.25 plus 25% of the excess over $37,950


$91,900 to $191,650 $18,713.75 plus 28% of the excess over $91,900


$191,650 to $416,700 $46,643.75 plus 33% of the excess over $191,650


$416,700 to $418,400 $120,910.25 plus 35% of the excess over $416,700


$418,400+ $121,505.25 plus 39.6% of the excess over $418,400


Single Sam knows his taxable income of $29,600 places him in the second row in this table. That means he is in the 15% tax bracket. He sees he must pay $932.50 plus 15% of the excess over $9325. Sam needs to calculate the “excess” over $9325, so he splits his income into 2 parts: the $9325 and the excess.

For the $9325, Sam owes $932.50 in taxes. For the excess value of $20275, Sam owes 15% of that in taxes.


Sam just has to add those two tax values together to find his total federal tax bill for the year.

He finds that he owes $3973.75 which would round up to $3974.

An important thing to note is that Sam does not have to pay tax of 15% on his entire taxable income. This is a common misconception. He only pays 15% on the portion of his income that spills into the 15% bracket. If he had spilled into the 25% tax bracket, he would have to pay 25% only on the part of his income that was beyond $37,950, not all of it.


Example 02: A Real Millennial

Hopefully you are not Single Sam. If you are, you’re going to want to add some diversity to your financial plan and start saving for retirement. Single Sam is just there to show you how to use the tax bracket table. Now I am going to walk you through my tax bill calculation, which is a little more complex but still entirely doable.

Let’s gather all of my information first:

  • Gross Income: $58,642.66
    • $58533 income from work
    • $32.48 in investment dividends
    • $76.45 in earned interest on savings
  • Adjustments: $12,155.50
    • retirement contributions
      • STRS pension (14%): $8194.86
      • 403(b): $1800
    • health care premium: $855
    • educator expense deduction: $133.63
    • student loan interest: $1172.01
  • Deductions & Exemptions: $10,400
    • Standard Deduction: $6350
    • Personal Exemption $4050
  • Credits: $70.72
    • Lifetime Learning Credit: $70.72
      • This credit allows for a person to subtract 20% of tuition payments for earning a degree or acquiring further job skills


First we begin with my gross income and subtract off all of the adjustments to income.

After subtracting off all of those adjustments, we arrive at the number labeled “Adjusted Gross Income.” I want to hold on to this number because it is needed when I file my state taxes. I don’t need to do anything more with it right now.


Now I am ready to subtract off my deductions and exemptions to find my taxable income.

I see my taxable income is $36,087.16. I will scroll back up to the tax bracket table that Single Sam was referencing. I find that I also belong in the second row, since my income is between $9,325 and  $37,950. I am in the 15% tax bracket and I need to find my excess over $9325 to be able to calculate my total tax bill for 2017.

After breaking my income into the 10% and 15% brackets, I find my tax liability is $4946.80. But wait! I have that credit for Lifetime Learning. Since credits are dollar for dollar benefits, I get to subtract that value off this bill.


–  70.72


My federal tax bill for tax year 2017 is $4876.10. Since I paid in $6764.16 over the year through paycheck withholdings, I am due a refund.




My refund should be 1888.60 from the Federal government. Now, since the IRS likes whole numbers, I actually get just a tiny bit more than this. They round at various points in this calculation so my actual refund was $1890.00.

Thoughts on taxes

Since I know how to calculate my taxes, my next thought is “wow almost $5000 in taxes! That sure is a lot of money. Is there any way I can get out of that?” I don’t want to not pay my taxes, I just want to pay less. I think back to what helped me lower my tax bill to start with: adjustments, deductions, and credits. I could always earn less…. but then, I am earning less money. I don’t want to do that (even though $58k included a bonus I won’t get again). You might have noticed that Single Sam paid $903 less than I did in federal taxes, even though I made more than $18,000 more than he did. Adjustments, deductions, and credits really help lower your tax liability. I realize if I contribute more to my pre-tax retirement accounts I could lower my AGI which in turn lowers my tax bill. Now I am thinking I want to save more for retirement because there is a direct benefit to me now.

Many people are due a refund at tax time because they pay too much in over the course of the year. Remember that this is determined by the number of allowances you set for yourself. For 75% of the year, my allowances were set to 0 which is why I am getting a refund. Some people always want to get that refund. I took my refund and contributed it entirely into my Roth IRA last week. Setting yourself up to get a refund can be useful savings tool. Don’t set it so you’ll get a refund if you are going to spend the entire thing. Save at least 90% of it. If you’re bad at saving money, your tax refund can be a forced savings you only think about once per year. Just don’t do this if you always spend money as soon as it gets into your account.

After doing your federal taxes, you need to do your state taxes. That will be one of my next two articles, so stay tuned!


*Personal Exemptions are gone in the new tax bill so this calculation is not relevant for tax years beyond 2017.

A Year Without My Grandfather

A Year Without My Grandfather

One year ago today, my grandfather died. It took me completely off guard, and I did not think it would. He was 87 years old but I was still completely unprepared for him to go. Since that day, I have spent hours daily thinking about him, our relationship, and the things he cared about. In many ways, this blog is an exploration of our relationship, as my love of numbers came from him. The cover to my blog is the flag and the shells from his funeral. 

Growing up, I saw my grandpa almost every single day. He babysat me when I was a little kid. He drove me to and from swim practice in the summer and helped my mom out with taking me and my friends to and from sports and school activities. I rode my bike to my grandparents’ house because they lived in our same neighborhood. He was at my high school graduation. He taught me how to calculate square roots by hand, along with many other algorithms I have long forgotten. The more I showed prowess in my ever advancing math education, the more other family members lauded me as being like him. I never particularly desired to be like him, it just turned out that way.

After his death, I found myself doing two of his daily routines without really being aware of it: checking the weather and checking on the stock market. If I spent the morning at my grandparents’ house, I had to watch the channels my grandpa wanted until about 10:30 or 11 am. He flipped between Bloomberg and the weather channel. I never understood what they were saying on Bloomberg so I just waited til he flipped back to the weather. About 6 weeks after he died, I was visiting with my grandma and she told me how she’d been watching the stocks because that’s what he always did. She told me how he’d always tell her if they were losing or making money. Now she had to interpret it for herself.

Another time when she and I were visiting at my parents house, she saw my composition notebook where I budget and make all of my financial plans and asked to look at it. “Oh, Santo used to keep a ledger like this. You’re a lot like him, aren’t you?” she laughed. Now, I’ll never stop keeping a handwritten ledger. I had no idea I was doing anything like him. I just grabbed a notebook when I was in college to keep track of my scholarships and tuition bills, and I continued the habit as I added other sources of income.

When it comes to money, my grandpa knew what so many people miss: money is just a tool to provide security and to build a comfortable life. He avoided greed and gluttony. He built wealth through compound interest so that his family would be taken care of. Now that he is gone, his widow need not worry about food or clothes or shelter. My grandparents lived with his parents for the first years of their marriage, and they never moved out of their first house. There were small upgrades here and there, but they did not let their lifestyle inflate as they gained more income and wealth. I really started to internalize this over the past year. Money is a vehicle for one’s life. The more you save up, the safer and more comfortable you feel. After saving, then you spend on necessity, then you spend, modestly, to enjoy life.

My grandparents are like the OG frugalists. They were born the year of the start of the Great Depression. If you ever want to know how to truly be frugal, look no further than your own grandparents. In her basement, my grandma has shelves of supplies stocked up from spaghetti sauce to laundry detergent. Everything must be bought on sale, and only on sale, which means you don’t buy when you need it but when it’s available at buyable price. They live by the mantra “it’s not about how much you make, but about how much you save.” My grandfather saved/invested so much money and planned so well for retirement that when he reached the age of required minimum distributions (70 ½) from his IRA, he just withdrew the money and put it into his local bank. He didn’t even need that money he saved up. They tried not to spoil their kids or grandkids so that we would learn how to live on less and work for everything in our life. But at the same time, they built up a nest egg that eventually will pass on. They provided in knowledge and wealth at the same time.

My grandpa was one of those people who believes you should pay less in taxes throughout the year and owe money rather than to receive a refund. He implored “don’t give an interest free loan to the government!” While I’d like to honor his ideal, I am not quite there yet. One day, I hope I can adjust to this mindset and way of operating. Until then, I am trying to pay exactly the right amount, with perhaps just a little bit too much going in.

Every bit more I learn about investing and personal finance, I feel a little closer to my grandpa. He didn’t talk about this much with me, but it was a great interest of his. He wasn’t raised to talk openly about money but he was raised to be a breadwinner and to take care of his family. Times are different now and talking about money is becoming less of a taboo each year. And it isn’t just for men to make money anymore. My grandpa never stated that girls should just grow up and get married. He liked that his granddaughters went to college and can provide for themselves. Two of us became math teachers, one is following in his footsteps in military service, one is a doctor of physical therapy, and one is a social worker. My brother, the only grandson, also served in the military and is taking care of his own family.

A year later, I think about how much I have grown because of him. I miss him immensely. I miss him quizzing us on topics we had no clue about during holiday dinners. To stay close to him, I learn about baseball stats, investment strategies, and keep watching the weather. I wear his sweaters my grandma gave me and read his old novels. I carry him with me.

Tax Time: No Fear Tax Year

Tax Time: No Fear Tax Year

Our favorite season is here! Tax season! By now, you should have received your W2 in the mail or have received an email about how to access it online. You might be excited about this time of year because you’re looking forward to a refund. Or, you could be dreading this season because you have no idea what you owe the government. If you are anything like I was up until a year ago, you have no clue how your taxes are calculated. You know there are these things called tax brackets and you’re supposed to pay a certain percentage of your income to the government. But that number never seems to match what you punch into the calculator. Then there’s the fun little fact that we actually pay three different governments: our local, our state, and the federal government. Knowing what to expect from your tax liability is a critical part of taking ownership over your finances. Even if you don’t save, you pay taxes. Even if you don’t invest, you pay taxes. Even if you don’t leverage your credit card for cash back or airline miles, you pay taxes. Everyone has to pay taxes and every piece of personal finance is touched by taxes in some way or another. Once you start to understand how taxes work, you can start to control how much you owe.


How a clerical error forced me to figure out the tax code

The previous two years I really looked forward to tax time because in my head it was refund time. My first year teaching, I got a refund of over $1300! I thought that was amazing. I thought I did something wrong when I typed everything in to Turbo Tax. But then, nothing happened. I got no notice that it was wrong. Other people seemed unsurprised by this number. So when year two rolled around, I had a little pep in my step as I prepared to do my taxes with trusty ol’ Turbo Tax. But my number wasn’t green in the corner. It was red. RED. I owed money!! I had to take $535 out of my savings to pay Uncle Sam! I was furious. I was outraged. I was terribly confused. I didn’t hit submit because I thought surely something was wrong. I’d ask someone else and I’d figure this out. People at work offered me the names of their CPAs and said, “don’t worry, they’ll figure it out. You don’t really owe that much.”

With the most perfect timing, a guest speaker came up on my course calendar. Someone from a free tax prep center was coming to teach my students about taxes. This is the one thing students always ask to learn about, even though it is something most adults never concern themselves with. She walked them (cough *me* cough) through how to fill out the federal tax form 1040 and showed the math on the board of what we were doing. I repeated the calculation for my own income. The reality sank in and I knew I had to pay the money to the federal government. There was no mistake. At least not in Turbo Tax. I hadn’t paid in enough throughout the year to cover my total tax liability. I set up the program to pay the money in at my next pay check, but I was still terribly confused. My mom asked me “what are your allowances set to?” “Uh, what?”

My problem was I had no idea how any of my taxes are calculated. People always said it was superbly complex and a normal person couldn’t understand it. My acceptance of this almost mystical calculation as something I couldn’t understand is why I, and so many of you, don’t know what to expect at tax time. When that guest speaker came in, I slowly began to understand how to calculate taxes. When my mom asked about my allowances, I added in another layer of understanding. When I logged into my employer’s management system for our time, pay, benefits, and career changes, I found that my allowances were set to 3, a number that usually only people with a dependent would choose. I would never write in “3” for my allowances. Single people always write “0” or “1” in that line. I changed that number to 0 and then saw a big difference in my check the next time I got paid.

Tax code is a multilayered subject that I believe everyone has the obligation to learn the basics of. While you can’t just not pay taxes, you can do things to set yourself up to optimize your taxes. That is, you can do things that are good for you that reduce your tax bill and spread your tax bill evenly throughout the year. Taxes are just like anything else in your budget: you must account for them and you can make choices that increase or decrease what you spend.

Components of the Tax Formula

The first thing you need to know is that your taxes are not calculated off of your gross income. I made $58533.73 in 2017. The government just doesn’t multiply that by a percentage and take it. I used to think that. It’s OK if you thought that too. There are a bunch of calculations to do first before they apply their percentage. The federal, state, and local governments use different percentages. These different calculations are why people think that taxes are so confusing, but I promise it’s all just arithmetic and you can figure it out with just a four function calculator. Before we go into a full on calculation, we need to just understand the background information first. My next article will take you through all of the steps to calculate your tax liability using my gross income. If you understand how to calculate your taxes you can make some amazing choices to budget and to build your wealth. My motto here is “knowledge is power.” You should not be afraid or confused by this financial certainty called taxes.


Gross Income

Fairly straight forward: the total amount of money you make before taxes. This would be the money you make from your employer, as listed on your W2, and any other income you received, such as interest or dividends on investments.



These are sometimes called “above the line deductions” and are items that are subtracted off of your Gross Income. Adjustments reduce the number that the government takes a percentage of in taxes. The adjustment many millennials use is the Student Loan Interest Deduction. The interest you are paying on your student loan each year helps reduce your tax liability. Your health insurance premium, health account contributions like HSA or FSA, and your retirement plan(s) are also adjustments to your income. Whatever their value, subtract from your gross income.


Adjusted Gross Income

After taking into account all of your adjustments, you arrive at a number called the Adjusted Gross Income (AGI). This is used to calculate your taxes! Well, almost. You still have to subtract off any additional deductions, exemptions, and credits. Those come next. But this number that you get for your federal taxes is needed for your state tax calculation.



Now it is time to subtract off deductions. Just like adjustments, these are numbers subtracted from your income. So start with your AGI and keep subtracting. You will either go with what’s called “The Standard Deduction” or you will “itemize deductions.” People only itemize their deductions if it will benefit them more than taking the standard deduction. For tax year 2017, the standard deduction has a value of $6350. If deductions item by item add up to $6351 or more, a person should itemize.

Common deductions for itemization would be charitable contributions, mortgage interest, property taxes, state income taxes. You can also deduct sales tax you paid all year in lieu of deducting property and state income taxes. This would be a useful move if you bought something really big like a car. If you are a business owner, there are other deductions. But this post is just for Average Jane Millennial learning how to calculate her taxes. If Average Jane pays more than $6351 in charitable contributions, her mortgage interest and her state income taxes, then she will want to itemize her tax deductions. Otherwise she will just take the standard deduction.


Taxable Income

After subtracting off your adjustments and deductions, you have the value known as your “taxable income.” This is the value that the federal government is allowed to tax. You would then go to the tax bracket table for a single person, find where you land, and do the calculation. After a couple of operations, you find out your tax liability. This is what you owe, unless you have any credits to claim.



Credits are another way to reduce your tax bill for the year. Like deductions, they are values subtracted. But deductions are subtracted off of your income value before the percentage is taken. Credits are subtracted directly from your tax bill! This is better because you get a dollar for dollar reduction in amount owed. Common credits are the educational ones – American Opportunity Credit or the Lifetime Learning Credit – for those spending on higher education , the Saver’s Credit for those contributing to retirement accounts, earned income credit for those with moderate to low incomes, or the kid credits – the child tax credit, the adoption credit, and the child and dependent care credit – for those people with children. The best credits are of course the ones for people with children. Children save you money on your tax bill in order to offset the cost of raising them! The only credit I am able to claim is the Lifetime Learning Credit. I was able to subtract 20% of what I spent on summer classes at the local community college.



After all of that subtracting and multiplying you did above, you know how much you owe to the government. If you figure this out for the year a head, you might be interested in making sure you pay the right amount into them throughout the year. You might want to pay too much in so you get a refund at tax time. Or you might want to pay too little so you owe in at tax time. There are pros and cons to each of these options. Allowances are what you allow for in your tax bill calculation. The higher the number you choose, the less you pay throughout the year from your paycheck. The lower number you choose, the more you pay in throughout the year. When I found out my allowances were set to 3, I was furious because it makes no sense for a single, child-less, non-retirement contributing person. I know I did not write 3. After discovering this error, I set it to 0 and started contributing to a retirement account so my tax liability would be reduced.

If you choose “0” that means you are not allowing for any deductions or credits. You will almost certainly get money back at tax time. Since everyone is able to chose the standard deduction, you can select 1 allowance and not have to owe any money at tax time. Higher numbers, 2 or more, are used if you have additional deductions or credits to account for. If you are single and pay enough into your health accounts and/or retirement accounts, 2 could be the right number for you. If you have a child, 2 could be the right number for you. For every child you have, you can up your allowances by 1 more.


Your Next Steps

Now you know what all these different terms mean. Gather all of the values of each on a piece of paper or in a Google Sheet. You can then calculate your total tax liability for the year. I will demonstrate how to do this in my next article. We will focus just on the federal tax liability. States have different calculations but follow the same mold. I promise that you can do this. I taught my freshmen this year how to calculate federal taxes and they even came up with the algebraic representation for each tax bracket, something I won’t ask you to do. If a 15 year old with no tax burden can do this, then certainly you can calculate it for yourself!

Once you are able to calculate your taxes on your own, you can start planning in ways to reduce your tax bill for the future. Tax planning can really enhance the control you have over your finances. This is by far my favorite financial calculation I learned this past year. I no longer wonder what will happen at tax time; I am in control of it.

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“The price of anything is the amount of life you exchange for it.”

-Henry David Thoreau

“It’s not about how much you make; it’s about how much you save”

-millionaire grandma