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Money basics

My daughter just got her first paycheck and was shocked at how much was taken out. What should I tell her about taxes and other deductions?

First paychecks are a great time to introduce the issue of taxes and withholding, and to prepare your daughter for filing her first income tax return.

Start your talk by discussing the difference between gross pay (before taxes are taken out) and net pay (take-home pay). Then go over the various taxes and other deductions from her check.

When she started her job, she filled out a W-4 form. This is what established the amount withheld from her paycheck. You can use the IRS’s tax withholding calculator to see if too much or too little is being withheld. And she can update her W-4 at any time.

Also mention that the more money she makes, the more she will likely have to pay in taxes. But not all her money is taxed at the same rate. First, she will automatically receive a standard deduction ($5,950 for tax year 2012 ) and possibly other tax credits when she completes her tax return.

We have a progressive income tax structure in the U.S. For example, for the 2012 tax year, single filers paid a 10 percent federal income tax on the first $8,700 of taxable income. The next bracket – from $8,701 to $35,350 is taxed at a 15 percent tax rate. So, if your daughter will have a taxable income of $30,000, the first $8,700 would be taxed at 10 percent, and the remaining $21,300 would be taxed at 15 percent under the 2012 tax rate schedule.

The other deductions in her paycheck are more straightforward. There may be income tax withholding from her state. And there’s FICA. This stands for Federal Insurance Contributions Act and is the money taken out to pay for Social Security and Medicare.

If your daughter is receiving health or retirement benefits, contributions for these may be coming out too.

For more money activities for your child, download the Money As You Grow activities flier, which describes money milestones for kids at various ages.

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