Taxes can be confusing for anyone. You probably wish you learned more about this in school.
Maybe you’ve tried to use an online program, but are still struggling to understand basic information about your taxes. Income tax rules and the laws around them can be complicated, but learning the foundation will help.
Keep reading this guide for help understanding taxes and the laws around them!
What are Taxes and Does Everyone Have to Pay?
Taxes are used to pay for social and civic needs in the United States. Income taxes help to maintain schools, government employee wages, and more.
Tax laws are written and approved by Congress and the US President. However, it’s the IRS, or Internal Revenue Service, who is responsible for enforcing the laws and collecting taxes. They will then give the collected money to the US Treasury.
Everyone in the US is subject to income tax, including all individuals, companies, and organizations. All income must be reported on tax returns, and then their taxes due are calculated.
There are some organizations and nonprofits that do not have to pay income taxes, but they do still have to file their returns. The basis of income tax is that the amount of money you owe is based on how much you earn.
Understanding Taxes and Your Income Tax
Income taxes are calculated based on the income you earn, meaning the money you receive from working, called wages. Income also includes interest, profits on investments, pensions and other retirement benefits and dividends.
Income tax is used by the government to pay for social services like Medicaid, national security, and Social Security. It also helps pay for infrastructure, like roads and highways throughout the US.
If you work for a company, your income is taken out of each of your paychecks. This process is called withholding. Your employer will then send the money to the IRS on your behalf. Withholding makes it much easier to ensure you’ve paid your taxes in time by the end of the year.
However, if you’re a freelancer or someone who is self-employed, you won’t have your taxes withheld for you. This means the government expects you to pay estimated taxes on your earnings four times a year. Filing quarterly taxes ensures that you’re sending that money to the IRS before filing your tax returns.
What are Tax Deductions and Tax Credits?
Tax deductions mean reducing your taxable income. Tax laws are set up to allow you to file many tax deductions so that you don’t necessarily have to pay taxes on the full amount of your income.
Some common tax deductions include contributing money to a retirement account, a charity, and work-related expenses. You can claim these tax deductions on your tax return and list the amount you contribute.
A tax deduction will subtract from your income so that you’re paying fewer taxes, but a tax credit is different. A tax credit will be taken from what you owe the IRS.
If you claimed all your deductions, you might still owe money to the IRS. But you can then use any tax credit money that you qualify for to pay the IRS the money you owe. It’s possible that someone’s tax credit will erase their tax debt, or at least lessen it.
Tax credits are based on certain qualifying tax benefits. So it’s important to understand which tax breaks you might qualify for, and can take advantage of.
Will You Get a Tax Refund or Owe Money?
If you or your company overpaid through withholding or by estimating your taxes, the government will refund you that amount. This is a common occurrence and can result in a few hundred dollars or even thousands of dollars from the IRS, depending on how much you overpaid.
However, you might have also underpaid throughout the year, and will then owe money. The money you owe the government from your tax return must be paid by April 15 of the following year. After that date, the government will start charging interest.
There are lots of programs to help individuals understand how much they owe the IRS and help to pay it back. The program you choose might help you find tax relief or create a payment plan.
What is a Progressive Tax System?
The US has a progressive tax system, which means that people who earn more money will pay a higher percentage than people who earn less. So this means your tax rate will change depending on how much money you make.
The debate around progressive tax vs. flat tax is argued throughout the country. Some politicians want a flat tax and will argue that a single tax rate for every individual and corporation would simplify the system.
However, politicians in favor of progressive tax rates believe it’s unfair to ask someone with a low income to pay the same amount of taxes as a person with a high income.
Learning How to Navigate Income Taxes is Possible
Looking for help in understanding taxes is very common since this can be a complicated topic. A lot of people choose to use a professional accountant to file taxes for this reason!
The core of income tax is that you owe the IRS money based on the income you earned in the last year. It’s possible that you will have many deductions you can file, along with tax credits. It’s important to understand these tax laws to ensure you’re paying the right amount.
Read more from our blog to understand your personal finances and how to navigate them!
