Thursday, March 3, 2011

Why a 200% raise = a 37% raise

The many advantages of being a full-time student include tremendous tax refunds. Last year was my first experience with H&R Block, and although I think what they charge is a bit steep for what they do, I just, you know, want someone else to do my taxes for me, damnit. It's faster and easier enough to justify the expense for me. 

Last year, my beloved Al found me an extra $2,000 in some type of education credit. This year, my beloved Al was on leave because he fell and hit his head. He should be fine, and I certainly hope that's the case because he was wonderful and very kind last year. In his temporary absence, George helped me, and I will be getting back quite a bit of money from the United States and the State of New York. I do, however, owe the State of Connecticut US$4.00. George was sure to let me know that I had until April 18 to cough up the Washingtons.

When it comes to generous refunds, I will probably not be so lucky in the coming years, as I will not be a student, and I will have 12 months of salary. I'll also be paying more in federal taxes because I'll be in a higher tax bracket than I was before. On top of that, New York State and New York City both like to steal and redistribute money. According to this handy paycheck calendar, if I am a resident of New York City, I should expect to have about 40% of my total earnings swiped from me before I ever see it, because of federal taxes, Social Security, Medicare, state tax and city tax. That's literally twice the rate I was paying on my old salary in Texas (where I made less and where there are no state taxes and, I think, no city taxes). What a stinky shame this is!

Of course, on top of more taxes, I will also be repaying student loans at the rate of roughly $1,650/month. Rent in New York is also a lot higher than in Texas. I've crunched the numbers, and any way you slice it, I'll be better off financially than I was before. But in the short term, the numbers turn out to be a little deflating. My base salary at Deloitte, before bonuses, is going to be more than three times what I made before -- that's a 200% raise. You'd think, therefore, that I'd be on Easy Street. But if you compare the actual cash taken home after taxes and rent (assuming rent of $1,750, which I sort of picked out of thin air), it turns out that I'll be making only about 37% more than before. When you think about it, that's truly unreal -- a 200% raise amounts to 37% more post-tax, post-rent spending cash?

There's a bit more nuance to this issue than what I've laid out, of course. And an MBA is really a long-term investment. Still, it's grating to see what looks like a jackpot get chipped away by taxes and student loans. But for now, I'm just going to enjoy fantasizing about what I might buy with my tax refund ... Maybe I'll make a nice donation to the Republican Party.

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