Show me the money

SHOW ME THE MONEY

By Greg Kollmeyer, Greater Springfield LIVING WELL Magazine

With all the hype in the media today surrounding the election, tax reform and candidates’ tax rates, have you ever stopped to wonder what all of these taxes do and where they come from? Let’s get to the bottom of this mess and SHOW YOU, the good citizens of Missouri, where your money goes.

You may remember that Congress extended the 2% payroll tax cut through the end of 2012, reducing payroll taxes for some 160 million Americans. You may have heard the media discussing Mitt Romney’s 15% tax bracket. You have heard many candidates discuss tax reform. Let’s shed a little light on what all of this means and start by defining the different types of taxes and where they go.

Payroll taxes

Payroll taxes are taxes assessed on an employee’s gross earnings and are borne by both employees and employers. It’s the employer’s job to make sure proper taxes are withheld from the employee’s paychecks and remitted on to the appropriate agency. In addition, the employer has its own taxes that it must pay on top of the employee’s withholdings.

  • Social Security tax – Since 1990, this rate has been 6.2% of gross pay for employees and 6.2% for employers to match. For 2011, Congress voted to reduce the employee’s share to 4.2% and has extended that through 2012.  This tax is also known as the OASDI tax (Old-Age, Survivors and Disability Insurance tax) and has been around since 1937 and covers just what it says. Look for this rate to be a hot topic in election campaign rhetoric as there is continued debate on whether this rate should stay at 4.2% or revert back to 6.2% or more.
  • Medicare tax – Since 1986, this rate has been 1.45% of gross pay for employees and 1.45% for employers to match. Unlike social security, this rate has not been reduced. Also known as HI tax (Hospital Insurance), this goes towards a retiree’s health costs.
  • Federal withholding – Only an employee withholding, this is income tax required to be withheld from employees’ paychecks and varies according to the number of exemptions claimed and tax bracket.
  • State withholding – Most states have an income tax system, including Missouri (although there has been some discussion of eliminating Missouri’s income tax in favor of an increased sale tax). This is an employee withholding and also varies according to the number of exemptions claimed and tax bracket.
  • Unemployment tax – This tax is an employer paid tax only and is a federal tax as well as a state tax. The federal tax is 6% of the first $7,000 of wages for each employee per calendar year. Employers in most states (including Missouri until 2011) receive a 5.4% reduction or credit of this rate making it 0.6%. Missouri employers received unwelcomed news in December of 2011 that Missouri had lost part of its credit reduction (0.3% to be exact) causing Missouri employers’ rates to increase to an effective 0.9% for 2011 (1.1% for the first half of 2011). This is due to Missouri (along with 19 other states including Arkansas and the U.S. Virgin Islands) not repaying funds it borrowed from the federal government for unemployment benefits. This will likely again come true this December for 2012 unless Missouri can get its borrowings paid current. In addition to the federal unemployment tax, employers also pay a state unemployment tax. This rate varies according to the employer’s history of amounts paid into the fund versus amounts charged against that employer for unemployment benefits paid.
  • Local withholding – Finally, some localities impose their own income tax.  Currently, Springfield does not have such a tax; however, Kansas City (1.0%) and St. Louis (1.0%) do. These taxes are required to be withheld by employers and forwarded on to the appropriate agency.

Income taxes

We all know what these are, but what is all the talk about different rates on different individuals and where does the money go? Federal income taxes are assessed on taxable income and the tax rate depends on your taxable income. Taxable income is your gross income, reduced by allowable itemized deductions (or the standard deduction) and personal exemptions (one for each taxpayer and dependent). There is much talk about a major tax overhaul to “simplify” the Internal Revenue Code. The last major overhaul was 1986 and that “simplification” took the tax code from roughly 26,300 pages to 40,500 pages (by the way in 1913 it was 400 pages and it’s nearly 72,000 pages today). Many deductions are on the potential chopping block as Congress looks for ways to right the proverbial deficit ship. Charitable donations and mortgage interest are two that have been tossed around and will most definitely stir a heated debate.

Rates on taxable income vary from 0% to 35% depending on your marital status and amount of taxable income. There is a special rate for long-term capital gains. That is gains from the sale of investments that have been held for more than one year. This rate also applies to certain corporate dividends. This is the 15% rate that Republican Presidential candidate Mitt Romney estimated his taxes to be. It’s likely due to the fact that most of his income is derived from investments instead of wages and thus taxed at the favorable rates.

Okay, back to where the money goes. Let’s assume you are in the 15% tax bracket for 2012 federal purposes, 6% for Missouri, and you make $1,000 per week or $52,000 per year. Your annual taxes withheld from your check are:

  • Social Security            $2,184
  • Medicare                        $754
  • Federal income            $7,000
  • Missouri income         $3,120

That’s $13,058 total taxes or roughly 25% of your paycheck. We’ve already discussed the Social Security and Medicare taxes, but where do the income taxes go? For the federal tax, according to the United States government printing office website and the 2013 budget, income taxes make up approximately 47.3% or $1.29 billion of the $2.73 trillion budgeted income for the U.S. without regard to Social Security and Medicare.  Using the $7,000 of tax from our example, $2,121 would go towards national security,  $749 would go towards interest on the national debt, $2,625 would go towards mandatory programs like Medicaid and other government programs and $1,505 would go towards discretionary spending such as the Department of Education and the Department of Commerce.

For the Missouri portion of your taxes, according to the 2013 budget summary, of the $3,120 in our example, $1,404 is used for human services, $281 for transportation, $168 for corrections and public safety, $53 for the judiciary, elected officials and the general assembly, $140 for higher education, $714 for elementary and secondary education and $360 for all other expenses.

So there you have it, a rough idea of the money trail. Pay attention to the election debates forthcoming and you’ll likely hear these topics in discussion. Missouri is traditionally a bellwether state. Educate yourself, exercise your right to vote, and “show” the country where you want the money to go.

Greg Kollmeyer, CPA, CFE, CFF, MAcc is a partner and founder of Kollmeyer & Company, LLC. For more information on this article or to schedule an appointment, call 417-881-9393 or email greg@kcocpa.com.