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You aced the interviews, the welcome reception and the introduction to the managing partner. So why does the packet of forms human resources has given you look so daunting? You are going to make important financial decisions that will affect your short- and long-term financial well-being, and law school may not have provided you with the background you need to make them. Instead of guessing and hoping for the best, understand these 10 steps — it’s a basic training approach for making the most of your financial life. FEDERAL INCOME TAXES AND WITHHOLDING All U.S. citizens and permanent residents are subject to federal income tax on their worldwide sources of income. That includes your associate salary, which is classified as ordinary income (and taxed at marginal rates starting at 17 percent, up to a maximum of 38.6 percent for calendar 2002). Federal income tax will be withheld from your paycheck based on the filing status and number of personal exemptions you elect when you complete Form W-4. STATE, LOCAL INCOME TAXES AND WITHHOLDING Similarly, you will be subject to state and local income tax on your salary, and these taxes will also be withheld from your paycheck. Ordinary income for New York state residents is taxed at marginal rates ranging from 4 to 6.85 percent. New York City residents are subject to local income taxes at marginal rates from 2.7 to 3.5 percent. SOCIAL SECURITY, MEDICARE TAXES Both you and your firm are required to contribute funds to the Social Security and Medicare system, based on your salary; you and your employer each contribute the same amount. Your contribution will be 6.2 percent of the first $84,900 of your salary for Social Security taxes, and 1.45 percent of your salary, without limitation, for Medicare taxes. For someone earning $100,000 in 2002, that is equivalent to $6,713 in Social Security and Medicare taxes; for an associate earning $50,000 in 2002, it is $3,825. EMPLOYEE BENEFITS These programs can cost an employer as much as 20-25 percent of an associate’s salary, so they are an important component of compensation. Beyond enrolling for life and medical insurance coverage, be sure to take maximum advantage of other benefits that may be offered to you, including: � 401(k) Savings Plan. There may be a waiting period, but jump on this plan when you are eligible. By participating, pre-tax earnings are withheld from your salary and invested in a menu of investment options offered by your employer’s plan. Employers frequently match employee contributions — think of this as an immediate return on your investment! � Flexible Benefit Plans. These use pre-tax earnings to pay for certain expenses, which can include group medical insurance premiums, out-of-pocket medical expenses and dependent care expenses. For example, $5,000 of qualifying dependent care expenses paid with pre-tax earnings through a flexible benefit plan will save a taxpayer subject to the 27 percent federal marginal tax rate over $1,300 in federal income tax. You must elect a level of participation, e.g., $2,500 for out-of-pocket medical expenses, and file claims for reimbursement as the expenses are incurred during the year. In our example, $2,500 would be withheld from pre-tax earnings through payroll deduction and paid as claims are filed. But, if you do not file claims equal to the amount you had withheld, you will not receive the difference. Use it or lose it! � Transit Checks, Employee Assistance Programs. New York state employers may choose to participate in transit check programs that allow employees to purchase local bus, train and subway fares with pre-tax earnings. Also, many employers offer employee assistance programs that employees may use for counseling services with respect to a wide variety of needs. DISABILITY INCOME REPLACEMENT INSURANCE This is often an overlooked form of insurance coverage. It may feel like it can never happen to you, but life, and health, are very unpredictable. Younger employees are more vulnerable financially, as they have had less time to accumulate resources to fall back on in case of a medically disabling event. If your employer does not offer group long-term disability insurance, consider joining a bar association to get benefits through the association’s plan. LIFETIME LEARNING CREDIT This may be the year in which a new associate is eligible for this income tax credit. Such credits are valuable as they are a dollar for dollar reduction against your actual income tax liability. The maximum credit is $1,000 per year against your federal income tax liability, based on 20 percent of qualifying expenses (tuition and fees). Any graduate or professional degree course qualifies, as do courses to acquire or improve job skills. The credit is phased out at fairly moderate levels of adjusted gross income — between $40,000 and $50,000 for individuals filing single for 2002. STUDENT LOAN INTEREST DEDUCTION Similarly, 2002 may be the year in which a new associate is eligible for this income tax deduction. It is helpful as it reduces your taxable income, but not your actual tax liability, dollar for dollar for interest paid on student loans of up to $2,500 annually. However, the credit is phased out at moderate levels of modified adjusted gross income, e.g., $50,000-$65,000, for individuals filing single for 2002. ROTH IRA This is as good as it gets. As a new associate, you may be eligible to contribute up to $3,000 in 2002 to a Roth IRA, as long as your adjusted gross income does not exceed $95,000 (for individuals filing single for 2002). Although your contribution is non-deductible, your qualified distributions when you retire are entirely income tax free. The Roth IRA is a great way to start saving early for retirement, and it has provisions that may allow you to take a penalty-free early withdrawal for a first-time home purchase. If you are not eligible for either a Roth IRA contribution or 401(k) participation this year, consider making a non-deductible IRA contribution of up to $3,000 in 2002. This is yet another way to start saving early for retirement. TO RENT OR BUY? Housing costs can eat up take-home pay. While renting may be a more economic option in the short term, and the prudent option at the beginning of a career, purchasing a home can still offer significant tax benefits that can bring the cost of owning closer to the cost of renting. But most important, make sure that whichever you select, you do not build up an unreasonably high level of fixed expenditures for housing. If those costs, whether rent or mortgage and real estate tax payments, account for a high percentage of available income, you have much less flexibility for saving, discretionary spending and meeting financial emergencies — or opportunities. ASSET ALLOCATION Recent volatile financial markets have taught that asset allocation is among the most important factors in managing savings. You will have an array of savings and investment vehicles to manage, from cash reserves to personal investment portfolios to 401(k) plans and IRAs. Take time to gather information about your investment options in all these plans, and devise an overall asset allocation that is consonant with your timetable for the use of funds that you save, your risk propensity, and your ability to save. Time is on your side, especially if you make prudent asset allocation decisions and implement savings programs to meet your goals. Suzette Loh is a certified financial planner and a principal of Eisner LLP, accountants and advisors.

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