Personal Finance

Introduction to Personal Finance

Introduction

  • Andrew Head, a professor of personal finance and a Certified Financial Planner (CFP), introduces himself.
  • He teaches various courses, including introductory personal finance, advanced topics in financial planning, insurance and risk management, and practice management.
  • The session aims to provide graduates with essential personal finance knowledge to avoid common mistakes and gain a head start.
  • He suggests continuing to learn about personal finance and consider taking a personal finance course, Center for Financial Success (CFS).
  • The CFS offers advice on budgeting, spending plan management, debt and income optimization, insurance, and student loans.
  • To schedule an appointment, visit wku.edu/cfs or follow on social media.
  • Financial advice obtained in college is more affordable than after graduation.

Topics to be Covered

  • Tax concepts and their impact on pay and finances.
  • Common employee benefits: health insurance, life insurance, disability, and retirement accounts.
  • Employer-sponsored retirement accounts and Individual Retirement Arrangements (IRAs).
  • Miscellaneous ideas.
  • Take breaks due to the heavy nature of the material.

Taxes Overview

  • Taxes are the most significant budget expense.
  • Taxes are withheld from paychecks; graduates with higher incomes will likely face higher withholding rates.
  • Student jobs may not withhold FICA taxes, which will be present in post-graduation paychecks.
Allocation of Tax Money
  • Federal government is the primary tax recipient.
  • Payroll taxes (FICA) and federal income tax are key components.
  • State income tax and local taxes may also apply.
  • Taxes are applied without deductions for other taxes paid.
  • Combined taxes can constitute a substantial percentage of income.
Federal Budget Allocation (2019)
  • Social Security, Medicare, and Medicaid receive the majority of funds.
  • Social Security and Medicare are funded through FICA tax.
  • Income tax subsidizes these programs.
  • Defense and other non-defense items also receive funding.
  • Mandatory spending on Social Security, Medicare, and Medicaid limits budget flexibility.
  • Discretionary spending, mainly defense, is subject to annual changes.
Sources of Federal Revenue
  • Individual taxes comprise over half of federal revenue.
  • Payroll taxes also come predominantly from individuals.
  • Corporate taxes account for a smaller percentage.
FICA Tax
  • FICA funds Social Security and Medicare.
  • Social Security: 6.2% of income up to approximately 143,000143,000. It's an insurance program (OASDI): Old Age, Survivors, and Disability Insurance.
  • Medicare: 1.45% of all income (no income cap).
  • High-income earners may have an additional Medicare tax of 0.9%.
  • Employers match FICA contributions: important to note that employers also pay these taxes.
  • Self-employed individuals pay both the employer and employee portions of FICA tax (self-employment tax).

Federal Income Tax

  • Most of the money comes from individual income taxes.
  • Individual income taxes make up more than half of the nation's needs at the federal level.
  • Employment tax is the FICA contribution paid by both the employee and employer.
  • Business income taxes decreased due to the Tax Cuts and Jobs Act of 2017, reducing the corporate income tax rate from 35% to 21%.
  • Corporate tax reduction aimed to stimulate investment and job creation.
  • Tax cuts for individuals included adjustments to tax rates and brackets.
Tax Brackets and Rates
  • Tax brackets and rates were reduced for most people in 2017.
  • The income thresholds for each bracket were increased.
  • Different filing statuses: single, married filing jointly, head of household.
  • Married couples can choose to file jointly (
    preferred in 99% of cases) or separately.
  • Married filing separately is usually chosen during divorce proceedings but may result in higher taxes overall.
  • To qualify for married filing jointly, one must be married as of the last day of the tax year; being previously married the entire year and only getting divorced as of December 31st would mean you file single for that tax year.
  • Head of household: unmarried individual with dependents that they responsible for more than 50% of their support.
Tax Bracket Misconceptions
  • Misconception: Earning additional income that pushes you into a higher tax bracket means you will have less money overall.
  • Reality: You only pay the higher tax rate on the income that falls within that specific tax bracket.
  • The tax system is designed to encourage earning more money.
  • Example: If you earned exactly 40,52540,525 of taxable income (in the 12% tax bracket) and then are given one more dollar, that extra dollar falls into the 22% tax bracket, thus ensuring you are still coming out ahead despite paying more in taxes because of the one additional dollar.
  • The initial earnings are not taxed at the higher rate, just any earnings inside the bracket.
  • Tax rates:
    • the first 9,9509,950 is taxed at 10%.
    • the amount between these two points (roughly 30,10030,100 taxed at 12%.
Calculating Tax
  • The amount of money between the threshold gets taxed at a certain rate. For instance, if you are earning 100,000100,000 as a single individual, that's between these two numbers, and therefore you're in 24% tax bracket. This is not accurate; you only pay the 24% on the amount above 86,003.7686,003.76. For example, earning 523,601523,601 means only one dollar is taxed at the 37%.
  • Marginal rate: The tax rate on the next dollar earned.
    • Tax on the prior ranges: The total tax rate on all of the pre existing brackets.
Average vs. Effective Tax Rate
  • Your effective tax rate includes all tax and is computed by dividing total taxes by total gross income.
  • The effective tax rate is used to estimate the total tax amount one should be carving out when budgeting.
Federal Income Tax Formula
  • Start with income (all sources of wealth).
  • Exclude certain amounts (gifts, inheritances, contributions to specific things).
  • This arrives at gross income (reported on form 1040).
  • Take certain deductions for adjusted gross income (AGI).
  • These are above-the-line deductions (student loan interest, IRA contributions).
  • AGI is used for various purposes, including FAFSA.
  • Standard deduction or total itemized deductions. The goal is taxable income, which goes into the various tax brackets and rates.
  • Figure out the total tax bill - your total tax for the year.
  • This may not mean one has to write a check to the IRS because if you are an employee of a company, the changes are your employer will be required to withhold money from your paychecks.
  • This is the end, which can result in a refund, in which case you receive income from the IRS.

Walkthrough of what's considered in different accounts:
* Salary
* Birthday and other gifts (excluded)
* Interest on savings account (generally excluded, unless municipal interest)
* Receiving life insurance (excluded from taxable income)
* Contribution to 401k (excluded)
* Paying for health insurance

  • Adjusted Gross Income: Student loan interest (capped at 2,500). The amounts of money that one can receive is not typically a reflection of how much the average person earns.

  • Standardized Deduction

    • Deciding on whether or not to use