Question: How do taxes affect your Spending Plan?
Answer: You have already answered that question.
Complete Answer: Taxes decrease the amount of money you have to spend in your Spending Plan. If you can describe your income and expenses for one month, the “money your received” (income) is in reality your “net pay”. Net pay, also known as disposable income, is the amount of money you get after taxes have been subtracted from your gross pay (total amount of money you earn). It is of critical importance that you understand that your spending plan is based on the money you have to spend (net pay) and NOT the money you earn (gross pay).
On the subject of taxes:
- If you receive an income tax refund at the end of the tax year, too much was withheld from your pay. If you have to pay additional income tax, not enough was withheld from your pay. You get to decide. Contact your employer if you want to adjust the amount of money withheld for taxes from your pay. It costs nothing to do so.
- My personal goal is to have the exact amount withheld from my pay that I owe.
- If you come into a chunk of money and think you might owe taxes on it, contact the Internal Revenue Service (federal) and your state department of taxation for the forms to make estimated tax payments. Again, there is no cost to you. You get to decide.
- Whenever I receive income of which no part was withheld for taxes, I make estimated tax payments or simply put money aside in anticipation of taxes owed.
- The best advice concerning taxes came from Jesus, “. . . repay to Caesar what belongs to Caesar . . . “.2 Pay the taxes you owe and be done with it.
Financial Literacy Knowledge/Skills: Your Spending Plan is based on your NET INCOME. Pay the taxes you owe and go from there.
Comments or Questions: Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and questions you may have about managing your money (Financial Literacy).
Next Week’s Topic: What does a Spending Plan (budget) look like?