Hello lil bees! Welcome to fund-u bites, where we get your future funded.

In the last two bites, we discussed:

1. Bite #1: money is a complex social and political tool

2. Bite #2: we all have a “vibe” around money. what’s yours?

The next few bites are focused on tactical learning, aka wtf should you do with your paycheck?

We’ll talk:

• Why did half my paycheck disappear: taxes.

• How to become an automatic millionaire without multi-level marketing schemes or losing your sleep: the reverse budget.

• You’re leaving free money at the table: 401k & investing.

I talked to a few seasoned financial gurus, and most were telling me they didn’t understand the basics behind taxes until they were in their 50s. No shame!!

It’s tax season, so let’s begin today’s bite with taxes.

where’s my paycheck going?

The income (i.e. your gross income) on your welcome letter is not how much that’s going into your bank account. Why?

TAXES! Think of taxes as your contribution to society, paying your share for all the stuff we use together to the government, like roads, schools, parks, libraries, etc.

When you get paid, your employer automatically withholds a portion of your income for taxes and send this money to the government for you. This is your net income. There’s a few different taxes:

• Federal Income Tax: goes to the national government. The amount you pay depends on how much you earn.

• State Income Tax: This goes to your state government. States like Texas, Florida, and Nevada don’t have this.

• Local Taxes: NYC residents may notice another tax on their paystubs; this funds city or county services.

• Social Security Tax (FICA): This funds Social Security, which provides retirement benefits.

• Medicare Tax (FICA): This funds Medicare, which helps with healthcare for older adults.

let’s talk U.S. federal income tax

The U.S. follows a progressive tax system. Here’s how it works:

Let’s say you make $100K per year, and you’re single.

Here are the U.S. tax brackets:

Are you taxed a flat 22%? No! This is a common misconception A lot of people don’t know this, but you’re actually taxed per bracket you fall into. In this case: 10%, 12% and 22%.

Here’s the math:

• 10% Bracket:

  • 10% of $11,925 = $1,192.50

• 12% Bracket:

  • ($48,475 - $11,926) = $36,549

  • 12% of $36,549 = $4,385.88

• 22% Bracket:

  • ($85,000 - $48,476) = $36,524

  • 22% of $36,524 = $8,035.28

• Total taxes you pay:

  • $1,192.50 + $4,385.88 + $8,035.28 = $13,613.66

So you’re not paying $22,000 in taxes; you are taxed per bracket for a total of $13,613.66.

Eagle-eyed readers may have noticed, why $85,000 instead of $100,000? Because of a standard deduction: a fixed dollar amount that you can subtract from your gross income to reduce your taxable income.  

When you file your federal income tax return every April, the tax software or the form itself will automatically include the standard deduction amount based on your filing status (single, married, etc.). Or you can file itemized deductions, but let’s not get carried away now 😁 

closing thoughts

I know you must have so many questions:

• If we have a progressive tax system, how do the ultra-rich evade taxes legally?

• How do taxes work for self-employed individuals?

• Should I file taxes with a professional, aka a CPA?

• Are taxes good or bad for society?

Great questions! The U.S. federal tax code is 6,871 pages, so there is a LOT to learn. And people have a LOT of opinions on the tax system. However, as Feynmann says, let’s learn the basics before we go pro. So we can make informed opinions for OURSELVES!

In the meanwhile, here are some resources for you to better understand taxes and if it’s your first time filing taxes:

• Ankur Nagpal Silly Money: Ankur runs a company about optimizing your tax returns and he talks about what exactly he uses

• Vivian Tu on How Taxes ACTUALLY work: You probably know her as your rich BFF but she recently released a podcast to better understand taxes.

• Parks & Recs Ron Swanson on taxes for a good giggle:

And Sneh’s recommendation: Tools like TurboTax and H&R Block are great and free for W-2 employees. But… if you have a side business, invest in real estate, etc., I recommend connecting with a CPA to optimize your tax returns! The U.S. tax code is complicated and built to help people with businesses and real estate. CPAs charge at an hourly rate, but can be worth it if you have a complicated situation!

I just filed my taxes with my CPA this weekend since I have an LLC, so if you have any questions at all, reply or comment on this post so we can learn together! 🙂 

Next up in fund-u bites, we talk about the budgeting technique no one talks about, aka how to become an automatic millionaire.

With 💛 & until the next 🐝,

Sneha