In the first month, we paid $5188 in taxes out of $16,469 in income. There was another $120 of interest income, but it was untaxed. This is a 31.5% effective tax rate. I suppose it would be slightly higher if I counted the employer side of social security and medicare. On the other hand, it might be slightly lower if I counted the untaxed employer contribution toward my retirement and health-care benefits as income. There are many ways to count this stuff, and I’d welcome any thoughts on how I should be counting this.

We have classified our taxes into various categories, including (1) federal, (2) state, (3) local (e.g., municipal franchise fees for cable TV and cell phone taxes), (4) sales, and (5) gasoline (federal and state). Out of the taxes paid, sales tax accounted for a measly 3.5%. Federal was the big winner with 72.0% of taxes going to “them.” The state took 23.1% of the pie. The other categories sucked up the balance.

See you in February!

Lots of taxes this week. Our first cellular phone bill arrived in the mail, which included 3.48 of miscellaneous lifeline credits and other 911 surcharges. My wife got paid again, which bumped our total up about 1200. Recall that her paychecks are structured strangely, so this time her withholdings increased to $875 federal, $349 state, and $51 medicare. We also went out to eat with friends a few times, filled the car up with gas again, and bought just a few groceries, which are mostly untaxed.

As I was doing our taxes this week, I realized that this project ultimately will have to carry into 2011 in order to find out how much we over- or underpaid our federal and state income taxes in 2010. After we subtract any refunds and add any payments, then we will have an accurate count for 2010. I do not expect much of a change, however, since this year we got a refund (net state and federal) of about $300.

So, here’s the run-down. Taxes this cheque included $857 in federal, $320 in California state (this was $275 last year), $63 in medicare, $271 in social security, and $48 in California disability/unemployment insurance. This is a total of $1558 or about 35% of my gross pay.

Interestingly, although I got a 1.5% raise last year, my paycheck is about the same as it was before the raise! California has decided to front-load their income taxes, making us pay more throughout the year and will give us a refund come tax filing season (April 2011). Supposedly the tax liability is the same, but they want cash faster. I’ll believe that my tax liability is the same when I see the returns. I wish I could get an interest-free loan somehow. Hell, California will probably just give me an IOU instead of a real refund. In all honesty, however, we generally owe a little bit of money to California for our taxes, so this might balance it out.

One thing that I don’t know whether to count toward taxes paid is the employer’s side of social security. Technically, our human resources department classifies this as a fringe benefit. Presumably it’s part of my total compensation and, if the tax didn’t exist, would have to be paid to me in cash as that’s what the market rate for my labor would dictate. Alternatively, if I was a contractor doing the very same job, I’d have to ask for a higher pay rate because I would be expected to pay both sides of SSI and Medicare. Oh well, it’s easy enough to calculate the overall tax percentage at the end of the year with it or without it. It would be another $6621.60 paid on behalf of me. I’d be interested to hear what you think about that.

This paycheck had gross earnings of $3502. The obvious contributors to taxes are federal income tax withholding of $373, state income tax withholding of $115, and Medicare taxes of $60. My wife does not have to pay into social security, so this reduces her tax burden. You may not know that some counties, back in 1980 before social security was mandatory, opted out of the system entirely! I anticipate that was a very astute move, as I doubt I will get as good of a social security deal as the greatest generation! Read more about that at the National Center for Policy Analysis.

I’m a lucky guy to have a partner with a real career, stable job, and a very decent salary.

This week will bring my wife’s first paycheck of the year to analyze.

That means for my wife’s fill-up tonight, where the per-gallon price was $3.459, the taxed portion was about 69 cents. For a $40 fill-up, that was $7.99 or 20%. I’m going out on a limb and suggesting that the state profited more than anyone else in the supply chain on this transaction, since they have practically no marginal costs associated with collecting it. At least, this simple chart suggests that producers’ net margin is on the order of 10-20% over a long period of time. What do you think?

Thus, in 2010, we intend to keep a journal of every source of income and every expenditure so that we can share with the public exactly how much we pay in taxes. We will share with you pay stubs and receipts, and together we will categorize and analyze them to build an understanding of “where it all goes.”