Help me with US taxes, please

Factual Questions
1

I’m putting together a website to help people calculate what their tax contributions would be, for a given salary. I’ve already done a UK version - it’s been up for about a year now and is getting quite a few visitors every day. Looking at the webstats, I see that more than half of the people who find that site are actually in the US, and therefore it’s no good to them. Any UK dopers who want to take a look, it’s here: http://www.thesalarycalculator.co.uk.

However, because I don’t live in the USA, I don’t really have any idea how the US tax system works. I’ve done some investigation on the internet, and I’ve put together an attempt here: http://us.thesalarycalculator.co.uk. However, all I’ve managed to do is federal income tax and social security. And even then, I’m not sure that I’ve done it right. Please can some wise American Dopers give me a hand? I have a few questions:

In the UK, we have a tax-free allowance, and any earnings under that value are not taxed at all. Does such a thing exist in the US, or is everyone taxed from the first dollar they earn?

Are social security contributions just an extra % of tax, in essence, or are they tax deductable, perhaps?

Each state has different income tax laws - I’ve done some routing around, but the most detailed description I’ve found doesn’t give all the tax bands etc for every state. This means that I’ve not been able to include the state income tax in the calculator.

I’ve seen references on other sites that do similar things to “deductions”, which are not taxed. What are these? Is this like contributions to a pension, perhaps? Or do you get deductions for having a spouse and kids? Should I have options on thesalarycalculator where the user enters a monthly deduction value, or a tick box for “spouse” etc? Would this be going into unnecessary detail for the purposes of my site?

The tax year in the UK runs April - April, so I’ll have to update the UK version in a short while with the new data, when it becomes available. Am I right that the tax year in the US is January - January? But that you’re all busy entering your tax forms till April so I should keep the 2005 data on the site for the moment? Where can I get the 2006 data (I could find it for Social Security, but not for Federal Tax)?

Thanks very much for your help, I really appreciate it. There’s only so much I can do, not being a US taxpayer. I’m not trying to make this site cover all possibilities - as you can see from the UK one it’s just the basic tax, national insurance and student loan. There’s no facility to add other contributions, and for most cases that’s fine. I’m hoping the same’s true in the US.

Thanks again

2

Form 1040-EZ, look at lines 1-6

Assuming I did it right, if your income is less than $8,200 if single or $16,400 if married filing jointly, you won’t have any taxable income. (mine wasn’t, I only worked part-time for part of last year so I’m getting a full refund on my federal tax withheld from my paycheck)

3

That should read, my income was less than $8,200, therefore I paid no tax. (that’s federal income tax, I still paid social security and medicare)

4

If your result is $0, you’ll still want to file and get your tax money back as a refund.

5

Yes, I did, and am. :slight_smile:

6

Thanks, Rigamarole, I’d missed an important point there. Now I’ll trawl through the 1040A and see if I can make some sense of it and get it to work on my site. In the meantime, I think I should put “beta” on the site to make sure no one thinks it’s all that accurate :slight_smile:

7

You can see the tax schedule, as well as the answers to your other questions, at the IRS web site.

Are social security contributions just an extra % of tax, in essence, or are they tax deductable, perhaps?

They are separate from income tax and not tax deductible. They are a fixed percentage of income up to a maximum per year.

I’ve seen references on other sites that do similar things to “deductions”, which are not taxed. What are these?

Deductions are amounts that reduce your taxable income for items that Congress has seen fit to subsidize. The most notable item is interest expense on a home mortgage. You may also deduct taxes levied by states or localities, and charitable contributions. It’s all reported on Schedule A (PDF file).

*Or do you get deductions for having a spouse and kids? *

For dependents and yourself, you get an exemption, which is a little different than a deduction but works the same way for practical purposes. Everybody takes allowable exemptions, but taking deductions with Schedule A is optional. Alternatively you may take a standard deduction.

*Am I right that the tax year in the US is January - January? *

Yes, for personal income tax. Payments due April 15.

Where can I get the 2006 data (I could find it for Social Security, but not for Federal Tax)?

Due to constant changes in legislation you will probably not find it until late this year. The tax preparation software companies send out updates as late as January to reflect tax code changes.

I’m not familiar at all with UK taxes but U.S. taxes can get complicated quickly. You are playing in a very competitive and tough market. Looking at your site, it looks like you are providing this information only for Google ad revenue. Sites like Turbo Tax offer this completely free (just to do the calculations; filing costs money), with all the complexities included.

8

As CookingWithGas has stated, the amount of tax paid by “typical” Americans can vary by a lot. I have a very large home mortgage and live in a place with a very high state income tax. That means that on my taxes, I can basically subtract the interest paid on my mortgage and the state taxes I have paid to reduce my income that is subject to the Federal income tax by a very substantial margin. (Those deductions do not reduce my income on which I have to pay Social Security taxes, BTW.) Someone living with my same income in a state with lower taxes and rents an apartment will pay a lot more in Federal income taxes than I.

And that’s not even considering important issues like how many kids one has, the Earned Income Tax Credit for lower income people, and a million other factors!

Which leads me to a question for you, Fromage, how accurate is the UK version of this cacluator?

9

I’d put “Alpha”, with a note of explanation.

“Alpha”, IMHO, means "Look! This does something. It might not do the right thing, but it’s something.

“Beta” ought to be reserved for “We know there are probably some bugs out there, but we’ve fixed all the ones we know about and are actively adding features.”

10

I work in software and I am not sure this is a “doable” project. I don’t know much about the UK tax code but the US tax code is insanely complictated. Anyone above a very basic return has to resort to professionals or buy special software that is constantly updated to know their tax status.

People living next door to each other with the same household income could be paying vastly different amounts based on how their life and assets are structured. You simply cannot build a simple calculator that says how much any individual will owe on taxes. You could look at averages but those are much different than the published rates. Most people get “deductions” and there is no way to find those out without aggregating actual tax returns by state and even city.

State and even local taxes come in many, many different flavors as well and they are important to an individual tax return (we all file a tax return to the federal government and one or more states depending on living and working arrangements)

This isn’t something you can build on your own. You could calculate the maximum amount people would owe based on the “standard deduction” and federal rates only based on the simplest return. This applies only to a minority of people however.

11

Also, giving tax advice can very quickly turn into giving legal advice. AFAIK that’s ok for laymen to do in the UK, but is a definite no-no in the US.

12

BTW, for reference, the US site as it is now overestimates my Federal tax burden by roughly 35%. It isn’t even close.

13

I just tried it too. It is way high even if it was a normal year but my family had $0 dollars in federal taxes despite being in the top 5% of all earner because of some unfortunate life events. We did have to pay state taxes though because of different code.

To the OP: There are many ways of sheltering income from federal taxes and many of these ways include most established adults. Two of the biggest ways are interest paid on a morgtage which may be huge in the early years with today’s mortgages. Our retirmement plans can also shield a large portion of income aganist today’s taxes. Combine that with dependent credits and a whole slew of other things and you can see why that is something a simple calculator cannot do. Hardly any established adult pays the full rate.

To say thatr people are actually paying anywhere near that in the U.S. is completely dishonest.

14

Taxes in the U.S. can get very complicted very quickly. I work for a payroll company, so I’ve got a slight understanding. Here’s the basic taxes taken out of peoples’ checks:

Federal Income Tax (Varies)
Medicare (1.45%)
Social Security (6.2% on the first $94,200)
State Income Tax (Most states. Varies widely.)

Some states allow Local Taxes (PA for instance) These are probably the biggest pain.
Some states charge employees for portions of their unemployment or disability insurance.

In addition to the deductions, there can also be an Earned Income Credit, for low income families that is paid to them.

All that being said, your amount of tax withheld is going to depend upon any section 125 (pre-tax) plans that you might have. For instance, if I make a salary of $1000/month, and I have a pre-tax health deduction of $450, I will only get taxed on $550.
In addition to that, you also fill out a W-4 at the start of a new job, indicating the number of exemptions you have. For example, if you are single and by yourself, you have one exemption, which means you pay more taxes than if you have 3 kids to claim on your returns.

If you want to go on to the employer side of payroll taxes, there is FUTA, SUTA, Medicare again, Social Security again, sometimes SDI, work comp (not really a tax, but it is required insurance), and I am sure there are others I am forgetting.

Sorry for the horrible formatting. If you want more details, let me know and I will respond tomorrow at a more decent hour.

15

It also calculates the SS tax at a greater rate than 6.2%, and continues to calculate it (at the incorrect percentage) beyond the cut-off ($92,400).

16

The about page details the calculations it’s actually doing - under “Social Security” I’ve lumped in 6.2% up to $5,580 a year, and the 1.45% Medicare with no upper limit. That’s why it’s higher than 6.2% and doesn’t stop above $92,400.

Thanks everyone for your feedback. It certainly seems that things are a lot more complicated in the States! I’m not trying to create a site that does your tax return for you - I realise that’s a bit beyond me and there are sites that do it better. yBeayf raises an important point about legal advice etc - I think I need to be clearer that the site is just a guide, doesn’t take everything into account and so on.

I started the UK site as a hobby - there are other sites that do it but it was just an exercise in learning php. It’s about as accurate as this sort of thing can be - the tax bands are up to date, and most of the things that are witheld from your pay are also included. The Student Loan is an added bonus. I’ve had people comment “wow, I put my salary in and it was correct, to the very penny” - well yeah, it does the same calculation your payrole department :).

However, there are some contributions that the UK site doesn’t include - for instance, my company has a pension scheme, so it can’t calculate my take home pay exactly. Some people contribute to charity straight from their salary, which is tax deductable. The site doesn’t support that either. It’s meant to give people a general idea - they see a job advertised, how much difference would that £2,000 payrise make each month?

The US site is also a hobby - such a high percentage of the hits I get come from the US, I thought I’d try to do something similar. In the UK, for most employees (things are different for the self-employed), you don’t have to do a tax return. Your tax and NI contributions are witheld each month, and at the end of the tax year, if there’s been a mistake, you settle up with the Inland Revenue. I’d like the US site to provide people with the same service - work out your estimated take home pay. Of course, it works it in reverse, too - enter your desired take-home pay and it’ll tell you the salary you need to get it.

Those of you who have used the site more than once may have noticed that last night I added the option to select the number of dependents you have, and it includes that in the calculation of the tax deducted. Tonight I intend to add tick boxes for “I/my spouse am/is over 65/blind” for those deductions.

ishamael69, would making these changes give a pretty good estimate of the take-home pay each month (or week) for a high enough percentage of people to find it useful? Do employers do all the complicated tax stuff to make sure everyone has the right amount withheld each month, or do they basically do what I’m doing and then everyone files a return for a refund of the stuff they shouldn’t have paid tax on (mortgage interest, retirement plans etc)?

If I were to put a box or two labelled “pretax contributions” and the user could enter a dollar amount per month, would that be useful? Would they know how much they are contributing to these plans, or mortgage interest?

Man, if I ever get any cash from the Google ads (can’t blame a guy for trying - at least I’m not charging $15 to join :wink: ), I owe you all a beer. Or drink of your choice.

17

Unfortunately, I think the real world is much more complicated than your site takes into account. Even though your calculator works with Federal and FICA/Medicare taxes, there are a lot of other deductions that can impact your take-home pay.

[ul]
[li]State and/or local income taxes[/li][li]Health / Life insurance premiums[/li][li]Retirement/pension/IRA/401(k) contributions[/li][li]Flexible spending accounts for medical or child care expense[/li][li]Employee stock purchase programs[/li][li]Etc.[/li][/ul] Some of these are optional and some are not.

As a general rule of thumb, most Americans figure that they will not see 1/4 to 1/3 of their gross pay.

Employees fill out for their employer a W-4 form, which allows you to specify the number of dependents you have, and a rough calculation of other deductions to determine how much should be withheld. Some people prefer to minimize their deductions so that they get a big refund at tax filing time. Others try to come as close to the mark as possible so that the government doesn’t have free use of their money for the whole year. Still others overstate their deductions and wind up owing money at the end of the year. The IRS generally frowns on this practice.

The bottom line is that there is no simple formula to do what you are attempting.

18

That’s becoming apparent :).

As far as federal tax goes, if I could do a rough approximation of the W-4, though, it would be quite useful for a prospective employee? They could see roughly how much cash they’d be taking home each month (although of course, come tax return time that would be adjusted).

State tax is a bugger, not least because I can’t find all the details of the tax bands for all states. I’m prepared to write all the code (although when it comes to updating it with new values, I may not be so pleased) but it’ll take some time. I’ve left the line in the table for the moment.

Just to make sure I’m clear here - I’m not trying to do the whole tax return, it would be far too complicated for little ol’ me. What I’d like to do is allow someone to get a rough estimate for their take-home pay each month. As with the UK one, I’d like it to take into account most situations, but the idea is usability, not comprehensiveness. And it’s just an idle distraction, not a financial advice bot.

Some of you have mentioned that it was nowhere near getting yours right - if you don’t mind telling me, what deductions etc would you need to have registered on it for it to calculate it correctly? Is the blind/over 65 thing less important than a box for mortgage interest? Again, think of the W-4, not the 1040.

Thanks again, I really appreciate your insights.

19

Most employers offer a “standard” set of payroll deductions based on the number of dependents you have and your “tax bracket” or income band. They do not take into account any tax-sheltering options (except for a 401k pension plan if they applicable) or things that cause you to owe more, like freelance work on the side or capital gains.

Typically, at the end of the year the average American citizen has overpaid, and files their “tax return” to get the overpayment back (you cannot get it back without filing). Many Americans like to keep it this way (overpayment) because there is the potential for penalties if you underpay, plus it feels like a little windfall for summer vacations and such. Others feel that you are offering the gov’t a interest-free loan when you do this, and prefer to tell their employer the exact amount they want witheld, which is also an option.

Either way the employer does not get involved in calculations. It either witholds the standard amount, or uses the numbers you provide.

20

Let me make a suggestion that might be thoroughly unexciting for you: rather than mucking around with myriad deductions, exemptions, credits, and so forth, why not use a simple mathematical formula?

If I’m getting a raise, I just use: cp / CS = np / NS

cp = current paycheck, CS = current salary; np = new paycheck, NS = new salary

It’s not exact, but if one is simply using it to calculate the new take-home pay, it’ll get you a rough sense of what that raise means. All you have to do is input three numbers, and grade-school algebra tells you the fourth. It should work well enough for the raises most people see year-to-year.

The disadvantage is that it doesn’t take into account various things like changes in tax brackets, the cut-off for Social Security taxes, and loss of eligibility for the EITC. It also doesn’t look as cool as doing a five second tax return.