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TABLE OF CONTENTS Establishing a Monthly Budget... 5 70-20-10 Rule... 5 Financial Planning Pyramid... 6 The Titans of Credit... 7 Calculating Interest... 7 Education Funding Options... 7 Follow the Money from Pay to Tax Payment... 8 Internal Revenue Service (IRS) Form W-4... 9 The Paycheck and Paystub... 13 The Deposit Slip... 14 Writing a Check... 15 Keeping a Record of Your Transactions... 16 IRS Form W-2... 18 IRS Form 1040... 20 Scenario... 29 Part 1: Form W-4... 31 Part 2: The Paycheck and Paystub... 33 Part 3: The Deposit Slip Savings... 34 Part 4: The Deposit Slip Checking... 34 Part 5: Writing a Check... 35 Part 6: Keeping Track of Your Expenses... 35 Part 7: IRS Form W-2... 36 Part 8: IRS Form 1040EZ... 37 ANSWER KEY... 43 Financial Wisdom 3
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Establishing a Monthly Budget A monthly budget you may use as a model for developing your personal budget: Example Monthly Budget Estimated Income: Paycheck (after taxes) $2,100 Interest Earned $50 Total Estimated Income: $2,150 Fixed Expenses: Savings (P.Y.F.) $500 Car Payment $325 Rent $750 Cable TV/Internet $75 Estimated variable Expenses: Utilities $150 Food $200 Gas $100 Periodic Expenses: Car Insurance ($300/6 months) $50 Total Expenses: $2,150 Total Income: $2,150 - Total Expenses: $2,150 = $0 70-20-10 Rule Overall, a good way to keep debt in check is to follow the 70-20-10 Rule: Spend 70 percent of your income on living expenses such as rent, food, and gasoline. Save or invest twenty (20) percent of your income for financial goals and emergency expenses. Spend ten (10) percent on debt payments for items such as credit cards and car and school loans. Financial Wisdom 5
Financial Wisdom 6 Financial Planning Pyramid
The Titans of Credit There are three (3) main credit-reporting agencies in the U.S.: Equifax: http://www.equifax.com/home/en_us Experian: http://www.experian.com/ TransUnion: http://www.transunion.com/ By law, people are entitled to a free copy of their credit report from each of these companies once every twelve (12) months. It is against federal law for anyone to obtain another person s credit report without that person s permission. The most popular credit score is the Fair Isaac Credit Organization (FICO) score. The score ranges from about 300 to 850, with the higher score reflecting a lower risk for the lender. In general, a credit score of 680 or above is considered good. Calculating Interest Remember the formula used to calculate interest: Interest = Principle x Interest Rate x Time $3 = $100 x.03 x 1 year Education Funding Options Potential education funding options: College savings Scholarships and grants Federal education loans Private education loans Work-study programs Tuition assistance from an employer Military programs Financial Wisdom 7
Financial Wisdom 8 Follow the Money from Pay to Tax Payment
Internal Revenue Service (IRS) Form W-4 Each time you start a new job your employer will ask you to complete Internal Revenue Service (IRS) Form W-4. Your employer uses Form W-4 to determine the correct amount of federal income tax to withhold from your pay according to your personal financial situation. If you have dependents (usually children), you may choose to have a lesser amount of taxes taken from your gross pay. This would increase your net pay (the amount you actually receive each paycheck). CAUTION: If enough tax is not withheld from your gross pay, you will have to pay a lump sum of tax when you file your annual tax Form 1040. On the other hand, if too much tax was withheld, you will receive an income tax refund. The first part of Form W-4 contains explanations and basic instructions. Financial Wisdom 9
The second part of Form W-4 is the Personal Allowance Worksheet. This worksheet serves as tool to determine an appropriate tax contribution based on your personal situation. The directions to complete the Personal Allowance Worksheet are on the left side of the form for the blanks (A through H) on the right side of the form. Block H is where the sum total of lines A through G is entered. The third part of Form W-4 is the Employee s Withholding Allowance Certificate. Most of this section of the form is self-explanatory, but notice block five (5). In block five (5) is where the total from blank H from the Personal Allowance Worksheet is entered. Blocks eight (8), nine (9), and (10) are completed by your employer. Financial Wisdom 10
On the backside (Page 2) of Form W-4, there are two (2) worksheets: 1) Deductions and Adjustments Worksheet, and 2) Two-Earners/Multiple Jobs Worksheet. These worksheets are used in the same way as the Personal Allowance Worksheet on the front side of the form, but they are only used when needed. Financial Wisdom 11
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The Paycheck and Paystub When you receive your first paycheck, you may be surprised that the amount you get to take home (net pay) is less than you may have figured (gross pay). Net pay is less than gross pay because taxes are withheld from you paycheck before you receive it. A B C F D E G H I J A. Your name and the date, from beginning to end, of the pay period (one week in this case) B. The total number of hours worked during this pay period C. How much you are paid per hour of work D. Gross income for this pay period E. Total amount of gross income this Year To Date (YTD) F. Required taxes withheld during this pay period: a. Federal income tax b. Medicare c. State income tax d. Social Security G. Total YTD taxes withheld H. Net income for this pay period I. YTD net income J. Amount of take home pay Financial Wisdom 13
NOTE: Some states collect taxes and some do not; for example, Florida state residents do not pay Florida state taxes. The Deposit Slip Deposit slips are used to deposit money into checking or savings accounts. The look of deposit slips change from bank to bank, but the same general information is on all deposit slips. A DEPOSIT CHECKING! E SAVINGS! Today s Date B CASH F!!!!!.!! Customer Name C CHECK G!!!!!.!! Customer Address, City, State, Zip TOTAL FROM H OTHER SIDE!!!!!.!! I Sign Here (If cash is received from this deposit) SUBTOTAL!!!!!.!! D LESS CASH! J!!!!.!! X ACCOUNT NUMBER K 1092320004 $ TOTAL!!!!.!! A. The date the deposit is being made B. Printed name C. Printed address D. Signature only if receiving cash back E. Whether to deposit money into checking or savings accounts F. Amount of cash being deposited G. Amount of check being deposited (you can list more checks on the reverse side of the deposit slip) H. Total amount of checks listed on reverse side of deposit slip as being deposited I. Total amount of deposit before cash received J. Amount of cash to receive back K. Total amount of money being deposited Financial Wisdom 14
Writing a Check There may come a time when you ll have to write a check instead of use a debit or credit card such as when paying certain bills or purchasing a service or product from a business that does not accept credit or debit cards. A B C D E F A. The date the check is being written B. Name of the person or business to whom the check is being written C. Numerical dollar and cents amount D. Spelled out dollar amount E. Note about purpose of check F. Check writer s signature Financial Wisdom 15
Keeping a Record of Your Transactions Each time you write a check, withdraw money from an ATM, or use your debit card you need to keep a record of the transaction. NUMBER OR CODE DATE TRANSACTION DESCRIPTION PAYMENT AMOUNT " FEE DEPOSIT AMOUNT $ A B C D F 348 00 34 The 001 02/12 Sandwich 8 15 " 33 Shop 002 02/13 Music Depot E 18 38 32 DBT 02/13 Clothing Stop 44 53 " 2 G ATM 02/21 Cash 20 00 " 2 Financial Wisdom 16
A. Check number or code used to describe debit or ATM withdrawal B. Date of transaction C. Person or business to whom the money is going E. Whether the transaction has cleared the bank F. Amount deposited into account G. Current/running balance D. Amount of transaction Financial Wisdom 17
IRS Form W-2 Form W-2 reports employees annual earning and withholdings to governmental agencies, including the IRS and Social Security Administration (SSA). W-2 is a multi-page form. The IRS, SSA, state and local taxing authorities all need a copy, as does each employer and employee. The employer files the IRS and SSA copies directly with those agencies and provides the employee with sufficient copies to meet the other reporting needs. W-2 Forms may be filed electronically or on paper. Financial Wisdom 18
a. Employee s Social Security Number (SSN) b. Federal Employer Identification Number (FEIN) c. Employer s name, address, and zip code d. A control number e. Employee s name, address, and zip code 1. Total wages and other compensation for federal tax purposes 2. Amount of Federal income tax withheld 3. Amount of taxable wages for social security purposes 4. Employee s share of Social Security taxes 5. Taxable income for Medicare purposes 6. Amount of Medicare taxes withheld 7. Amount of taxable tips for Social Security purposes 8. Amount not included in boxes 1, 3, 5, or 7 9. Total Earned Income Credit (EIC) advance paid to employee 10. Taxable aspects of Dependent Care Assistance Program 11. Distributions from nonqualified retirement plans 12. Employers enter specific codes and the associated amount(s) 13. Employee s status employers check all that apply 14. Other taxable income not addressed elsewhere on the form 15. State in which employee resides and employer s state identification number 16. Taxable state wages and tip 17. Amount of state taxes withheld 18. Taxable amount of county or city wages and tips 19. Amount of county or city taxes withheld 20. Location code Financial Wisdom 19
IRS Form 1040 You can file your taxes online, but many people choose to use the paper version of IRS Form 1040. This form can be picked up from your local post office or downloaded from the IRS website at http://www.irs.gov. When it is time to complete your tax form, you will need the right 1040 form, the instruction booklet that goes with your form, and Form W-2. Some people, such as independent contractors, also need Form 1099. IRS Form W-2 Form 1040EZ Form 1040EZ Instructions IRS Form 1099 The first part of Form 1040EZ is where you enter your name, address, and SSN. People who are married also identify their spouse in this section. Financial Wisdom 20
The second part of Form 1040EZ is where you enter information about your income. You use the information in block one (1) from your W-2 to complete block one (1) on your 1040EZ. Line/block two (2) is where you enter the total amount of taxable interest earned. Line/block three (3) is where you enter the total amount of unemployment compensation received if that amount is greater than $2,400.00. The rest of this section is selfexplanatory; you simply follow the provided instructions. The third part of the 1040EZ is the Payments, Credits, and Tax section. Block seven (7) is where you enter the total amount of federal income tax withheld; this information is usually in block two (2) of your W-2 form. To complete block eight (8) of the 1040EZ, you have to first do complete the Making Work Pay Credit worksheet located on the back of the 1040EZ. If you answer yes to question 1a, you proceed to block four (4) where you enter $400.00 if you are filing taxes as a single person ($800.00 if married filing jointly). From there, you simply follow the provided step-by-step instructions until you have filled in block eleven (11). The information in block eleven (11) of the Making Work Pay Credit worksheet is then entered in block eight (8) of the Payments, Credits, and Tax section. Financial Wisdom 21
The information in block eleven (11) of the Making Work Pay Credit worksheet is then entered in block eight (8) of the Payments, Credits, and Tax section. Blocks 9a and 9b pertaining to Earned Income Credit (EIC) are only completed if you can claim a dependent such as your child(ren) or if you have served in the military during combat. Instructions for completing these blocks are located in the instruction booklet that accompanies the 1040EZ. Financial Wisdom 22
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To finish the Payments, Credits, and Tax section, you first add lines 7, 8, and 9 to fill in block ten (10). After that, to complete block eleven (11), you have to use the information in block six (6) to look up the tax amount in the tax table provided as part of the instructions booklet. In this example, the amount in block six (6) is $33,955.36 for a single person who is not filing joint taxes with a spouse. The tax amount is $4,681.00 which is entered in block eleven (11) of the 1040EZ. Financial Wisdom 24
The next two (2) sections of Form 1040EZ are used to determine if you have to pay taxes or are going to receive a refund because too much tax was withheld from you gross pay. If the amount in line/block ten (10) is greater than the amount in line/block eleven (11), you will receive the difference as a refund. If the amount in block ten (10) is less than the amount in block eleven (11), you have to pay the difference to the IRS. Generally, if you properly complete Form W-4, you will not have to pay additional taxes. If you are receiving a tax refund, you have the choice to either receive a check from the IRS in the mail (usually takes about six (6) weeks to receive), or have the money directly deposited into your checking or savings account. Lines 12b and 12d are used to have your refund directly deposited into an account of your choosing. The final part of Form 1040EZ is where you sign and date the form. If someone else completed the form for you, then that preparer also signs and dates the form. Jane F. Doe 01/15/10 Take a moment to look at the whole, completed 1040EZ. Financial Wisdom 25
Jane F. Doe 01/15/10 Financial Wisdom 26
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After you have a signed and dated your 1040EZ, you need to staple a W-2 to the upper left hand corner of the 1040EZ before mailing the 1040EZ to the IRS. If you have to pay taxes, enclose a check or money order payable to the Internal Revenue Service for the amount owed. The last page of the instructions booklet that accompanies the 1040EZ lists addresses to where to send your form and payment. Financial Wisdom 28
Scenario In the following scenario, you will complete various forms pertaining to income, expenditures, and taxes. The certain references and the forms you will complete are located on pages 28 through 40. The general instructions for are located on this page and the following page (page 27). For the purposes of this scenario, your personal identification information is as follows: Jane Frances Doe, Medical Technician 4569 Main Street Any Town, FL 12655-0241 Phone number (850) 123-4567 SSN: 123-45-6789 If you wish, you may use your own name and contact information. Part 1: Form W-4 On your first day of your new job (12/22/2010), your employer hands you a stack of forms to complete. One (1) of the forms is IRS Form W-4 (2010). In this scenario, you are not married and you do not have dependents. To avoid the risk of paying taxes, you enter zero (0) in block five (5) of Form W-4. Part 2: The Paycheck and Paystub You have a job as a education researcher for which you are paid $11.72 per hour. You worked 40 hours this week and earned a gross income of $468.80. You actually take home a net of $372.34 this pay period. After exploring the paycheck and pay stub to determine where the other $96.46 went, complete the following blanks: A. Year to Date (YTD) gross income: $. B. YTD net income: $. C. Federal income tax withheld from this paycheck: $. D. State income tax withheld from this paycheck: $. E. Social Security tax withheld from this paycheck: $. Part 3: The Deposit Slip Savings On January 1, 2010, you take your paycheck of $372.34 to your bank and decide to deposit $50.00 into your saving account. Complete the deposit slip. Part 4: The Deposit Slip - Checking At the same time that you deposit money into your saving account (01/01/2010), you decide to deposit most of the remainder of your paycheck ($372.34 - $50.00 = $322.34) into your checking account, but you need to keep $20.00 in cash for miscellaneous expenses. The total you need to deposit is $302.34. Part 5: Writing a Check On January 3 2010, you use check number 001 to buy a new CD from Music Depot for $18.38. Financial Wisdom 29
Part 6: Keeping Track of Your Expenses On January 3 2010, your account balance before using check number 001 to buy the CD at Music Depot for $18.38 is $348.00. That same day, you use check number 002 to buy items from Wally World in the amount of $12.58. Later, you use your debit card to buy pizza from Pizza Town in the amount of $23.07. Finally, you use an ATM to withdraw $40.00 in cash. Because the ATM is not your local bank s, there s a $2.50 service fee to use the ATM. Complete the checkbook register for these transactions. The only check that has cleared the bank is the one you wrote to Music Depot. Here s a breakdown: Starting balance is $348.00 Check 001 on 01/03/2010 to Music Depot in the amount of $18.38 (cleared) Check 002 on 01/03/2010 to Wally World in the amount of $12.58 (not cleared) Debit card purchase on 01/03/2010 to Pizza Town in the amount of $23.07 (not cleared) ATM withdrawal in the amount of $40.00 on 01/03/2010 from ATM charging service fee of $2.50 Part 7: Form W-2 After exploring the W-2, complete the following blanks: A. Wages, tips, and other compensation: $. B. Taxable amount for Social Security purposes: $. C. Federal income tax withheld for this year: $. D. Social Security tax withheld this year: $. E. Medicare tax withheld this year: $. Part 8: Form 1040EZ Complete Form 1040EZ as though you are Jane F. Doe using the W-2, tax table, and other information provided for this scenario. The filing date is January 15, 2010. The checking account information has already been completed for you in Form 1040EZ. Financial Wisdom 30
Part 1: Form W-4 Financial Wisdom 31
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Part 2: The Paycheck and Paystub 123 Jane F. Doe Pay Period: 12/23/10 to 12/30/10 Required Deductions Earnings Hours 40 Rate 11.72 This Period 468.80 YTD 22500.00 Federal Income Tax FICA Medicare FL State Income Tax FICA Social Security 63.95 06.16 00.00 26.35 3325.20 320.49 00.00 1370.37 Gross Pay 468.80 22500.00 Other Deductions Health Insurance 401K Parking 00.00 00.00 00.00 00.00 00.00 00.00 Net Pay $372.34 $17483.94 Your Employer 1234 Some Street Somewhere, FL 12345-6789 00906 11-3679451 BRANCH 68897 PAY TO THE ORDER OF Jane F. Doe ******************Three hundred seventy-two dollars and 34 cents************************$372.34 Some USA Bank City, CA 91235-7856 1 000888 1 123000228 0000000038 Financial Wisdom 33
Part 3: The Deposit Slip Savings DEPOSIT CHECKING! SAVINGS! Today s Date Customer Name CASH!!!!!.!! CHECK!!!!!.!! Customer Address, City, State, Zip TOTAL FROM OTHER SIDE!!!!!.!! Sign Here (If cash is received from this deposit) SUBTOTAL!!!!!.!! X LESS CASH!!!!!.!! ACCOUNT NUMBER 1092320004 $ TOTAL!!!!.!! Part 4: The Deposit Slip Checking DEPOSIT CHECKING! SAVINGS! Today s Date Customer Name CASH!!!!!.!! CHECK!!!!!.!! Customer Address, City, State, Zip TOTAL FROM OTHER SIDE!!!!!.!! Sign Here (If cash is received from this deposit) SUBTOTAL!!!!!.!! X LESS CASH!!!!!.!! ACCOUNT NUMBER 1092320004 $ TOTAL!!!!.!! Financial Wisdom 34
Part 5: Writing a Check Jane F. Doe 4569 Main Street Any Town, FL 12655-0241 001 DATE PAY TO THE ORDER OF $ DOLLARS Main Street Credit Union 7896 Main Street Any Town, FL 12655-0241 MEMO :002003004 1092320004 001 Signature Part 6: Keeping Track of Your Expenses NUMBER OR CODE DATE TRANSACTION DESCRIPTION PAYMENT AMOUNT " FEE DEPOSIT AMOUNT $ BALANCE 348 00 Financial Wisdom 35
Part 7: IRS Form W-2 Financial Wisdom 36
Part 8: IRS Form 1040EZ Financial Wisdom 37
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ANSWER KEY Financial Wisdom 43
Part 1: Form W-4 Jane F. Doe Financial Wisdom 44 12/22/2010
Part 2: The Paycheck and Paystub A. YTD gross income: $22,500.00 B. YTD net income: $17,483.94 C. Federal income tax withheld from this paycheck: $63.95 D. State income tax withheld from this paycheck: $0.00 E. Social Security tax withheld from this paycheck: $26.35 Part 3: The Deposit Slip Savings Part 4: The Deposit Slip Checking Financial Wisdom 45
Part 5: Writing a Check Jane F. Doe 4569 Main Street Any Town, FL 12655-0241 001 DATE 01/03/2010 PAY TO THE ORDER OF Music 18. 38 Depot $ _Eighteen Dollars and 38/100 DOLLARS Main Street Credit Union 7896 Main Street Any Town, FL 12655-0241 MEMO CD Jane F. Doe :002003004 1092320004 001 Signature Part 6: Keeping Track of Your Expenses Financial Wisdom 46
Financial Wisdom 47 NUMBER OR CODE DATE TRANSACTI ON DESCRIPTIO N PAYMENT AMOUNT " FEE DEPOSIT AMOUNT $ BALANCE 34 8 0 0 34 8 0 0 001 01/ 03 Mus ic Dep ot 1 8 3 8 " 32 9 6 2 00 2 01/ 03 Wa lly Wor ld 1 2 5 8 31 7 0 4 DB T 01/ 03 Pizz a 2 3 0 7 29 3 9 7
Tow n AT 01/ Cas 4 0 2.5 25 4 M 03 h 0 0 0 1 7 Part 7: Form W-2 After exploring the W-2, complete the following blanks: A. Wages, tips, and other compensation: $21,652.68 B. Taxable amount for Social Security purposes: $22,102.68 C. Federal income tax withheld for this year: $3,325.20 D. Social Security tax withheld this year: $1,370.49 E. Medicare tax withheld this year: $320.49 Part 8: Form 1040EZ Financial Wisdom 48
Jane F. Doe 01/15/10 Financial Wisdom 49
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