Section 7.1: Taxes, Cost of Living, and Take-Home Pay

Section 7.1 Focus

In this section, you will explore how much money you take home in your paycheck after taxes and other deductions. You will learn the difference between gross pay versus net pay, some of the tax deductions and withholding taken from paycheck, and differences in cost of living under different scenarios. You will have the tools to determine whether or not you need to file taxes and be able to explain how taxes and benefits factor into spending and savings plans.

Background

To accurately develop your spending plan, you need to understand your income. There are numerous deductions taken from your gross pay (hours multiplied by your hourly wage). Your net pay is the amount of money you receive after deductions are taken. Standard deductions include:

• Federal income tax – tax you pay the federal government.
• Social Security – a contribution toward Social Security retirement benefits.
• Medicare – a contribution toward Medicare benefits.

The amount of federal taxes withheld will depend on the amount of your pay and the number of exemptions you claim on your W-4 (the form you complete when you start your job). An exemption is a deduction that allows a certain amount of income to be excluded to avoid or reduce taxation. Exemptions may be for the individual and family members who the individual supports. This unit provides material for you to understand your income and what you are responsible for in taxes.

Source: Mapping Your Future Links to an external site.

Watch

These short videos help you understand your paycheck withholding and taxes.