“The hardest thing to understand in the world is the income tax.”
-Albert Einstein
The easiest way to answer this question would be: Somewhere deep in the 7th ring of Dante’s inferno. But in all seriousness, it comes from a complex tax formula. For example, if an individual makes over $400 biweekly but not over $1,392 then you take 12.40 + 15% x Amount over 400. There are different ways of withholding, but that’s the simplest. When you start a job they have you fill out a W-4. The exemptions claimed, the number of kids you have, or if you are married all contribute to how much you get to wave goodbye to for Federal Tax Withholdings every time you collect your paycheck.
It’s not so bad considering you will see that money again; perhaps not in its entirety. Refunds are not always the way to go. I mean if you don’t claim so many exemptions, some of that money can go right into your savings and begin compounding interest. Get the right number of exemptions and keep them update them with your life situations and you won’t need to worry about your refund every year.
This year, The American Recovery and Reinvestment Act has a provision called “Making Work Pay”. This stipulation provides a refundable tax credit up to $400 for working individuals and an $800 one for married couples filing jointly. The credit is calculated at a rate of 6.2 percent of the earned income. This became effective as of 3/10/2009. Sadly the credit stops as the AGI (adjusted gross income) reaches excess of $75k for single people and $150 for those married.
