Why Are You Paying Taxes?

The US Federal government has mandated the need for taxes for a very long time. In fact, the individual income tax that you pay on your earnings accounts for the largest portion of revenue for the federal government. This has been the case since the year 1950.

If you’ve ever asked the question “What do taxes pay for?,” then this should shed some light on the matter for you. The easiest way to look at our motivation for paying taxes is from the perspective of the law.

Maybe if people were given a choice to pay taxes, they wouldn’t. Even if people knew that taxes serve a good purpose, many people would just ignore them. To prevent such an outcome, municipal governments put tax laws in place. These laws speak to the taxes that each person is expected to pay and the conditions under which they become due. There is also a reference to the amount that each person is to pay.

Taxes don’t exist because governments thought that collecting money from people sounded like fun. In fact, many of the government services that people enjoy are either completely or partially paid for by taxes.

One aspect of this that’s easy to point to is the public or state-owned transportation system. How do you think all the expenses of such a system are covered? Your answer to that may be that the fares cover it all, but this is not always the case.

The revenue collected by the buses cannot always cover the various expense sources, such as salaries, vehicle maintenance, vehicle repairs, vehicle replacements, operational overhead, etc. Because of this, tax is collected from all public citizens that use these resources to make up the differences.

Tax Types

There are three types of taxes that all government tax laws cover. All three are covered below.

Local Taxes

These taxes apply to counties, school districts, and cities. The bulk of the revenue that falls under this tax type comes from sales taxes, property taxes, miscellaneous taxes, fees, and intergovernmental transfers. These transfers are done from both the state and federal governments.

State Taxes

State taxes are collected from a larger pool of sources, since there is a wider coverage area. As the name suggests, these are taxes that fall under the purview of a state. Intergovernmental transfers are a factor here too, but they only come from the federal government.

Additionally, revenue comes from other areas, such as income taxes, sales taxes, fees and costs associated with universities and public hospitals, toll roads, severance taxes, estate taxes, and severance taxes. Corporate income taxes are also included in the mix, but these taxes are minuscule, so the revenue from them isn’t much.

These corporate taxes are kept low by design, as each state wants to attract businesses and the jobs that are synonymous with them.

Federal Taxes

The federal government is the largest collector of taxes. In fact, the total income generated from the local and state arms is typically less than that which is generated by the federal government.

Most of this revenue comes from personal income taxes that are paid by the working class. Additionally, there is revenue from payroll taxes, corporate taxes, estate taxes, tariffs, excise taxes, and Federal Reserve holdings.

How Taxes Are Used

You should now have a better understanding of the various tax types and how they benefit each arm of government. Now it is time to review how the revenue is used.

Local Governments

Local governments use their taxes for the improvement and continuation of government programs within their respective areas. For example, pension funds are a big focal area of the revenue generated from taxes.

Apart from this, most of the revenue goes to maintaining services, such as library and educational offerings. In fact, just about 40% of the revenue tends to be put into education. Hospitals get about 10%, the police get about 6%, and about 5% is used for the maintenance of roads and welfare programs.

State Governments

State governments have different priorities than local ones, so some of the spending areas and some of the allocation percentages are noticeably different.

For example, social services get a 40% allocation. This includes everything from public housing, to welfare and Medicaid. Much of this funding is that which was received from federal government fund transfers. Tertiary education gets about a 20% allocation. Hospitals get around 10%, roads get 10%, 5% goes to corrections, and a similar 5% goes to the state police.

Federal Government

The IRS is the bane of the existence of many people. This is especially true when Tax Day rolls around in April. Tax Day is a day that is selected as the deadline for filing any taxes for income earned in the previous year. For example, April 15 was Tax Day in 2019. That was the final day for income taxes for 2018 to be filed.

Of course, many people just feel as if the IRS takes their money and makes it disappear, but this is not the case.

Social Security is the biggest recipient of federal tax dollars, as just about 25% of earnings are focused there. These funds are used to make the necessary payments to all beneficiaries of Social Security programs. Of course, payroll taxes and the Social Security Trust Fund (which is also 85% driven by worker contributions) are the biggest contributors to these social security programs. The trust fund is known as America’s retirement fund, so it’s the government’s way of helping you to secure your future post-retirement.

After social security, defense accounts for the next heaviest investment. The Department of Veterans Affairs and Homeland Security are beneficiaries of this spending. Additionally, this is where the brave men and women in uniform of the US Military get their funding from. Not only does this area of spending cover salaries for the military, but all the needs that arise during wars or to protect the US from attacks come under this umbrella.

The problem with this kind of spending is that most people can’t measure it. If a country had planned to attack the US but subsequently didn’t because of military technology investment, how do you measure the value of the prevented attack? The truth is that you can’t, which is the same problem with spending that covers needs associated with those who are fighting wars overseas. You may not see it, but that funding doesn’t come out of thin air. Contributions from people like you make this possible.

After defense, Medicare is the next priority. Most of this allocation is also covered by payroll taxes, but you don’t directly benefit from this until you have reached the age of 65. When you do get to that age, though, it is convenient to have the service available to you.

Medicaid follows Medicare, and this is another area that you may never benefit from. Remember that this offering is for preventative care for low-income families. So if you do not fall into that bracket, take solace in the fact that you are one of the reasons that these families can get the medical attention that they need.

There are other areas of spending too, such as funding for government agencies like the Department of Education and Health and Human Services.

Tax Power

This section is dedicated to helping you understand who has the power to establish what kind of taxes are mandated.

Local Governments

There are taxation authorities in the areas that fall under local government. These authorities elect representatives who make decisions where taxes are concerned. City boards and councils are two groupings of these elected representatives.

These are the only persons who are involved in the decision of which taxes to impose. The decision is typically taken based on the needs of the jurisdiction.

State Governments

Every state has a legislative arm of government. This arm is responsible for legal matters, such as establishing and reviewing laws. This is where the decision of which taxes should be imposed lies. This arm is also responsible for adjusting the rates when necessary.

The basic idea is that the taxes that are collected should be enough to pay for the needs of the state in tandem with the funds provided by the federal government.

Federal Government

Based on the Constitution, Congress has the absolute power to both establish and collect taxes. While Congress has this power, it takes its direction from whatever is laid out in the president’s annual budget.

The president usually makes any recommendations that are deemed fit in the State of the Union Address. Upon doing so, it is drafted by the Treasury Department, who provides it to the president for submission to Congress.

All tax bills start the review process in the United States House of Representatives. If the bill is approved after the deliberation process (which involves the public), it is then passed to the Senate’s Finance Committee.

The committee then provides the bill to the full Senate once there are no issues. Should the Senate and the House agree to the bill, it is sent to the president for a signature. Note that the bill that the president gets back can be completely different, as the Senate is known to adjust the bill to the point of rewriting it completely.

If the House is to disagree with the Senate’s version of the bill, what ensues is a glorified negotiation to get to the point of agreement. The House and Senate have different motivations for the actions they take, which means that they are likely to have disagreements.

What Happens If I Don’t Pay My Taxes?

The process of taxation can be stressful and confusing for a variety of reasons. It can also be quite difficult to know if you need to pay taxes at all if you do not reside currently in the states but are a US citizen. You may be wondering what can happen if you fail to pay your taxes, or if it is even necessary for you. If this is the case, then you need to be careful because there are a number of different potential penalties and consequences that can arise if you fail to pay your taxes or if you do so incorrectly.

Do I Need to Pay Taxes?

There are actually many people who are obliged to pay taxes in the USA but are unaware of that fact. Often, this is because they were born in the US, but moved away as children or at some later stage in their lives. The US recognizes citizenship by birthright in many instances, which means that people born in the country automatically become citizens, simply because they were born there. There are some factors that may mitigate this, but it is usually the case, and the citizenship of the parents or whether or not they were legally a resident in the country often does not change the fact that the child becomes a US citizen.

If you are unsure of your tax status in the US, you need to make sure you find out as soon as possible if there is any doubt in your mind whatsoever. You do not want to risk incurring fines or any of the other consequences that may arise from failing to pay your taxes, which are covered in this article. If you were born in the US and now reside abroad and are unsure if you have tax obligations in the USA, we strongly recommend that you get in touch with the most relevant department of either state or federal government for you, who can give you further guidance and information on this issue.

What Happens If I Don’t File or Pay My Taxes?

There are a myriad of possible consequences that can arise from failing to pay your taxes. What exactly happens depends on your financial situation, your residential status, and other factors, like how much money you owe and if there are any existing concerns regarding your ability to pay your taxes.

If you do not file your taxes at all, then you generally face a fine, which increases with each month that you fail to file your taxes. This is called the failure-to-file penalty. The penalty starts out at 5% of the taxes that you have not paid for the first month, and then increases by 5% subsequently for every month that you fail to file your taxes. The maximum penalty is 25%. If you do not file your taxes, the IRS may actually do so on your behalf. They have access to information regarding your income and taxation status, and then can simply file it in your stead. However, they are unlikely to know about deductions that you may be eligible for, so it is best to take care of it yourself, instead of leaving it to the government.

If you file your taxes but do not pay them, the penalty is similar. You are charged at .05% cumulatively for every month that you do not pay your taxes, and the penalty once again caps out at 25%. However, you can also actually be charged interest on this amount. There are of course more severe penalties the longer you wait to pay your taxes. Not only can you likely miss out on repayments that you may be eligible for, but in a worst-case scenario, the government has the authority to seize your property or even your passport until you clear the air and fulfill your tax obligations.

It is possible to be exempted from such penalties for not filing your taxes on time. For example, you may not actually owe any taxes, and you may also be expecting a refund from the IRS or other department of government. If this is the case, then there are usually not any penalties for you for not filing a tax return, as is it not needed in this instance. The IRS is also generally fairly understanding if you are able to demonstrate that your failure to file or pay taxes on time was due to extenuating circumstances. If it was not the result of neglect on your part, then it is possible for them to remove any penalties that may have been imposed on you as a result of your failure to file or pay taxes on time.

Is It a Crime Not to File My Taxes?

Generally, it is regarded as unlawful to fail to file or pay your taxes in the US. However, this depends to some extent on your intent in this situation, and this is regarded in taxation law and by the IRS as the willfulness element. Essentially, if it is clear that you did not deliberately avoid paying taxes for some reason or that you were not actually aware of your legal duty, then you are unlikely to actually be charged with a crime. For example, if you can demonstrate somehow that you did not know you had an obligation to pay taxes in the US, then you are usually able to avoid the most serious punitive charges for failing to pay your taxes.

This is usually demonstrated by a pattern of behavior. For example, if it can be shown that the IRS has attempted to inform you of your duties or obligations to pay taxes or that you have communicated with them in some way, then you were most likely aware of your responsibility and chose not to act upon it. Conversely, if you have a condition that affects your cognition or some circumstances during the time in which you were expected to pay your taxes would have affected you substantially, this can be evidence that you were genuinely unaware of your responsibility to pay taxes at that time.

What If I Have Not Paid Taxes for Several Years?

The longer you have gone without paying or filing your taxes, the worse the complications are likely to be. For example, a worst-case scenario may be that the IRS feels it is appropriate that you face jail time as a result of your failure to fulfil your tax obligations, though this is generally reserved for the most serious offences. The amount of time you could be imprisoned for depends on the severity of the offence, both in terms of how long you have gone without paying your taxes and what the amount of unpaid debt is. This is clearly a compelling reason to take issues of taxation very seriously.

However, even if you have substantial outstanding debts that have not been paid for a considerable amount of time, you are not necessarily going to face jail time if you are upfront and honest about it. The IRS generally tries to avoid imprisoning people if at all possible, so if you are aware that you have considerable debts that you owe in the form of taxes, you should consider consulting with a lawyer who specializes in taxation or relevant issues. If you are upfront about what you have done and what you may owe, it is usually possible to avoid some of the more serious ramifications of failing to either file or pay taxes.

If My Taxes Are Outstanding, How Can I Pay Them?

If you have considerable outstanding taxes and are not sure how you can pay them, there are mechanisms in place that can make it possible for you to pay them back without experiencing too much difficulty, especially if your financial situation is somewhat fraught. It is generally possible to negotiate repayment plans, for example, if you are unable to pay your debts to the US government all at once. Usually these payments have to be made either weekly or monthly, and they continue until you have entirely paid back what you owed to the US government.

On the other hand, if you are unlikely to be able to pay back your debts monetarily, there are other types of compromises that can be made in order to ensure that your debts are paid back somehow. Depending on your circumstances, you may be able to negotiate with the IRS to come to some form of agreement where they accept a smaller amount from you to settle your debts in lieu of pursuing some form of punishment or enforcing legal consequences against you. If you don’t think you are in a position to pay back your debts in installments, then consulting with a lawyer who specializes in such issues is your best bet, as they can help you negotiate with the IRS and see if such an agreement can possibly be made on your behalf.

States with the Lowest Rate of Income Tax

We often think of income tax as a simple fact of life. It is something that is almost universally resented, and it is enforced in almost every country in the world. How much tax we need to pay depends on many factors, like income and marital status, but did you know that there are actually several states where income tax is not collected at all? This article goes over these states, as well as some of the benefits and drawbacks of living in a state that does not tax people on their income.

State and Federal Income Tax

One important distinction to make is that between federal and state income tax. As the US is a collection of states with a fairly high degree of independence, these states have a lot of say in their own laws and how much tax they charge people, as well as what they tax people for. In some cases, people are also required to pay tax to their local governments as well. States also vary quite widely in terms of what is taxable within those states and the rates that people are taxed at. There is also a lot of variety with regards to tax credits and deductions.

Generally, federal tax systems are progressive. This means that the more that a person earns, the more they are taxed, relative to their income. However, there is a cap, and there are also many potential deductions that a person can have from their taxable income. As far as the different states go, some states impose a flat rate of tax, while others also have progressive systems. For example, in Michigan, all people pay a flat rate of 4.5%.

States with Low Rates of Income Tax

Compared to many parts of the world, like Europe for example, almost all of the US has incredibly low rates of income tax. California is often cited as an example of high taxes in the US, with one of the highest rates of income tax at a flat rate of 12.7%. This changes progressively depending on your income, but usually caps out at around 37%. Compare this to Sweden, however. The Scandinavian nation is generally thought of as a peaceful utopia with a robust welfare system, and while this may be true, this is largely the product of their taxation system. In Sweden, income tax averages at around 57% per individual. So while income tax in California may be high relative to the other states, it is certainly not in a global context.

There are also other ways of effectively taxing income, which are not necessarily noticed in tax returns or pay-slips, but that can be felt in prices and purchases made instead. For example, there are property taxes, inheritance taxes, and gas taxes in many states around the US, and these also vary from place to place. Here is an overview of the states with the lowest rate of income tax, or which do not tax income, as well as some related information regarding the other types of taxation they have:

Nevada

This dry and hot state is famed for being home to Las Vegas, one of the world’s most famous cities. It is apt that such a place is within Nevada, as the state is home to many wealthy Americans, and it does not have an income tax. Its taxes are generally below average, and it also has below-average property taxes. The hotel industry and the casino industry in Nevada are both hugely lucrative for the state, and the state uses them to support much of the industry and infrastructure in other areas. Gas taxes in Nevada are slightly higher than average, but not substantially, at around 31.7 cents per gallon.

Wyoming

Known by many as the state of freedom, Wyoming is generally renowned for its somewhat lax culture, and this is reflected in the local politics of the state. Not only is there no income tax in Wyoming, but gas taxes in the state also fall below the national average. Combine this with both the local and state sales taxes, which are also both much lower than average, and it isn’t difficult to see why this state is so favored by those looking to preserve as much of their wealth as possible. Property taxes in Wyoming are also very low, roughly the ninth lowest in the whole US, which makes it easy to purchase and retain large tracts of land in this expansive and quiet part of the country.

Tennessee

It has a state income tax rate of only 2% on dividends and interest, but the effective income tax rate in Tennessee is 0%. It is also intended that, as of 2021, the state of Tennessee is no longer charging any income tax whatsoever, making it another of the entirely income-tax-free states on this list. Property taxes also are comfortably below the national average, as well as gas taxes. Gas taxes are actually substantially lower than average, being only 21.4 cents per gallon. However, there are some other systems of taxation in the state that make up for it. Both beer and sales taxes in Tennessee are actually the highest in the US, so it probably isn’t the best place to go for a shopping trip.

Alaska

Many refer to it as the Last Frontier. Alaska is a breathtaking and wild place, and for the most part, very sparsely populated. Income is not taxed in Alaska, and the average sales tax is only 1.76%. Anchorage is the largest city in Alaska, and it does not charge any sales tax at all. Property tax in the state is above average, but not substantially. There is also another perk for living in Alaska: each resident who lives in the state for a full year receives a dividend from the state. The amount changes every year, but in 2019 it was $1,606, and it 2015 it was $2,072.

Florida

This sunny state has no income tax, though there are several other tax systems in Florida which charge people at substantially higher rates than the national average. There are also county taxes which may be applied to certain purchases, like vehicles which cost over $5,000. Property and sales taxes in Florida are fairly average. The gas tax in Florida is quite high, though. As of 2019, it was around 41.99 cents per gallon, which makes it higher than most states in the US.

Washington

Washington has no income tax, though some of its other taxes are higher than the national average. For example, the combined state and local sales taxes in Washington are actually the third-highest rate in the whole country. It is also one of only a few states in the US that charge an estate tax. This means if you have an estate worth over $2,193,000, you are required to pay some level of tax on it. The rate of estate taxes in the US vary from 10-20%.

North Dakota

North Dakota is a state that is grounded heavily on agriculture, and the system of taxation reflects this to some extent. Sales taxes are low, and they are lowest when it comes to buying machinery that is used for agriculture or related ventures in some way. Property taxes in North Dakota are also somewhat lower than the national average, and like the other states on this list, it does not charge income tax. As of 2019, the gas tax was at 23 cents per gallon, which is considerably lower than the national average. The state is large and fairly sparsely populated, so having a low gas tax is something of a boon for residents who rely on their cars to get around.

South Dakota

The state that is famed for Mount Rushmore does not charge any income tax. There are also sales tax exemptions for many vital goods, like prescription medication, for example. However, there are a considerable amount of services that are actually taxed in South Dakota, and property taxes are roughly the same as the rest of the country.

Arizona

Arizona does actually charge income tax, but it is much lower than many other states in the country. It is also only charged for the highest earners in the state, so many residents do not actually have to worry about paying income tax, as it simply doesn’t apply to them in their case. As of 2019, the gas tax was also a lot lower than the average, at only 19 cents per gallon. The tax system in Arizona is actually quite complicated beyond this, however, as many counties charge sales tax for different types of items or goods, and it varies somewhat from place to place.

The average combined sales rate tax in Arizona is quite high overall, being around 11th in the US. The gas tax itself is low, but owners of vehicles in Arizona have to pay a license tax, which is unusual and something of a disadvantage in terms of the tax system in the state when compared to other states.   

New Hampshire

The last state on our list has a cooler climate than many of the others here, but it is a similar environment when it comes to taxation. Its system is fairly similar to Tennessee, in that income tax is quite limited and applies only to interest and dividends. There is actually no sales tax in New Hampshire, which takes off much of the financial pressure of shopping in the state, and the day-to-day expenses that add up are not as high as they might be otherwise. The gas tax is also considerably below the national average – in 2019, it was only 23.83 cents per gallon in New Hampshire. However, the property tax in New Hampshire is quite a lot higher than the national average.

As can be seen above, there are many states in the US which do not charge income tax, and this makes them fairly unique in a global context. It does not, however, mean that living in them is overall cheaper than other states, as they tend to be more expensive or have higher tax rates in other respects. As such, it is best to assess them in their entirety when it comes to taxation, instead of focusing exclusively on income tax.  

Taxes: What Are They and Why We Pay Them

Benjamin Franklin said, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

If there is one thing we can reliably trust to be around for the foreseeable future, it is taxes. Whether you are traveling the world, working online, or grinding through the 9-5 workweek, the government is going to be poking its nose through the door and asking for you to pay those sweet taxes. Within our lives, we are required to pay a host of different taxes, whether it is for the services we choose to use, products we splurge on, our homes, vehicles, and of course, what is taken off our monthly salary. Knowing why we pay taxes, what kinds there are precisely, and when you are required to pay them can help you get your finances in order and more easily manageable.

The Three Main Tax Systems

Progressive Taxes

Progressive taxes are the most basic, in that, as you earn a higher salary, you are entered into a higher tax bracket, which leads to you paying a higher rate of taxes to the government. Some people refer to this system as the graduated income tax. The government utilizes marginal rates of taxation that tax your income from one degree to another depending on how much you make annually.

Regressive Taxes

Unlike the progressive tax, the regressive tax does the complete opposite. As you make a higher salary, the regressive tax rate lowers, with a perfect example being the Social Security tax, which is a sort of payroll tax. As of 2019, earners of up to $132,900 are subject to this tax, and everyone is obliged to pay it. Above that limit, the rate is incredibly low.

Proportional and Flat Taxes

Proportional taxes are quite simply when one pays a tax rate proportional to how much money you have. This is sometimes called a flat tax. Some states do this. For example, a state charging everyone 10% is using a flat tax because everyone is paying the same flat amount.

Taxes and More Taxes

Now that we know the main systems of taxation, how do these end up applying in our day to day lives? Let’s see all the lovely taxes we pay.

  • Federal Income Tax: The federal income tax is a charge on your income and earnings. The government utilizes a system of progressive taxes, with around seven tax brackets. Taxes are collected throughout the year, mainly through paychecks. If you happen to be self-employed, then you’ll have to estimate what you need to pay at the end of the year. Most people end up giving too much by years end, so filing for a tax refund is required to get some of your money back.
  • State/Local Taxes: Most states have their own set of taxes you must pay as well. Of the 51 states, only seven do not. There is quite a bit of variation between the states in terms of what sort of taxation system they use. Nine of the states use a proportional tax rate, while most of the rest utilize a progressive tax rate system.
  • Payroll Taxes and FICA:  The majority of companies remove a portion of your salary for tax reasons and send them off to the government. Those who work for themselves must do this themselves. The federal government also taxes 6.2% of income for social security, as well as 1.45% for Medicare. These make up the FICA, which stands for the Federal Insurance Contributions Act. For those making above $200,000 a year, or $250,000 for married couples, an additional 0.9% is taken.
  • Self-Employed: If you happen to be working for yourself, the FICA tax does not apply. On the other hand, you are charged a self-employment tax, which is a 15.3% charge on your income that covers the Medicare and Social Security side of things. On the positive side, self-employed individuals are eligible to deduct 50% of their self-employment taxes at the end of the year when filing annual income taxes.
  • Taxes on Your Estate: These taxes apply to any valuables, money, or land that you pass on after death. It is taken by the federal government and is charged by some states as well. Depending on the value of your estate, how much you pay varies. The tax exemption for 2020 is around $12,000,000 for the federal government. Each state that does apply their tax has its exemption amount as well.
  • Taxes on Inheritance: In the same vein as the estate tax, this tax has to do with any valuables or land that is passed on in the event of someone’s death. Unlike the estate tax though, this tax is charged to the person inheriting the estate. Depending on the value of the estate that a person has inherited, as well as their relationship to the person who passed on, they are taxed a certain amount. Only a few states collect the inheritance tax, and the federal government does not.
  • Wealth Taxes: The wealth tax is applied to the net worth of a person. It includes your valuables, annual income, any savings you have, investments, real estate, properties, etc. There is currently no wealth tax being utilized within the United States, although it has been proposed before.
  • Property Taxes: There is quite a lot that goes into the buying of a home and having to pay property taxes is one of them. Depending on the value of the house, a certain amount gets charged. These taxes are usually applied at the city or county level. There is some variation in price depending on your location, and whether there is a school nearby as well.
  • Ad Valorem Taxes: This tax is applied to goods, services, and property. It is based on the value of the item.
  • Consumption Taxes: Some purchases made have a specific tax, known as the consumption tax, applied to them. Most are applied through retailers, who include it in the price of their goods being sold. You won’t know how much you are being charged for this, but just be aware that it exists.
  • Sales Taxes: The sales tax is applied to any goods or services you happen to purchase. It is seen on all bills of sale and is applied through states, cities, and local districts, not by the federal government. The rate of taxation varies from place to place, and some districts do not apply any sales tax at all.
  • The VAT Tax: The VAT tax, or value-added tax, is also applied to goods that you have purchased. Unlike the sales tax though, which is simply applied at the end of a sale, the VAT tax covers every stage of the development of a product. Since this happens at the production stage, the VAT has already been included in the price you see in the store and is not on any bill of sale for the normal client. This tax is common in many other countries, but it has not been introduced to the US yet.
  • Excise Taxes: The excise tax, much like the VAT tax, is included in the price of goods and services at every stage of production. There are only specific products that are forced to pay this tax, such as airlines, gas prices, alcohol, tobacco, and communication services. Some excise taxes are charged on health issues as well, such as the Affordable Care Act and taxes on pollution and gas emissions.
  • Surtaxes: These taxes generally only apply to those persons making significant amounts of income. A surtax is a tax layered upon another pre-existing tax. A good example is the Medicare tax we spoke of above, with those above $200,000 in earned income being charged an additional 0.9%.
  • Business Taxes: The business tax applies to businesses and corporations. It is generally applied after expenses have been tallied and net revenue has been found. The federal tax rates for businesses are not the same as for the individual. It is a flat tax rate of 21%. After that, states have different tax rates depending on the quantity of revenue a business has made in the year.
  • Tariffs: A tariff is a simple tax applied to any products being imported into a country. These taxes are meant to help local businesses have a better chance of competing against foreign companies.

Why Do We Pay Taxes?

Besides the obvious reason, being that the government imposes it upon us and if we do not pay, we go to jail, there are a host of reasons why paying taxes contributes to the public good. Much of the things we take for granted in society, such as the roads we use to travel, require huge amounts of upkeep and cost a fortune. Some of these include, traffic lights, sewage systems, piping, electricity lines, community centers, parks, and public pools, and the list goes on and on. Most of us go through our weeks not thinking about the massive cost of having all this infrastructure around us and keeping it working when crazy humans, nature, and plain old age are doing everything they possibly can to break them apart.

There is, of course, the issue of corruption and misuse of tax revenue, and this is an important point that must be repeatedly brought up to make sure that the heads of state and country stay honest and fix the many dysfunctional parts of the system that keep popping up yearly, but we must not let that blind us to all that we get from our precious dollars being taken away and sent off for the public good. So just keep in mind that taxes are one of the main reasons we have so many conveniences in our modern-day lives.

Taxes in the US: a History and an Overview

We have to pay them every single year, and a large part of our income goes to them. But why exactly do we pay taxes? What role do they serve in our society, and how are they determined? Taxes have been part of many different societies throughout history, and they still are a fundamental part of world governance today. The US has a complex system of taxation, due in some part to the federal system, which means that different states also tax their residents on different things. This article goes over the history of taxation, as well as the purpose they serve for us today.

A Brief History of Taxation

Taxes have changed much throughout history. They have been implemented since ancient times, but their role in those societies was different than it is today in many ways. Today, taxes are a key part of how political systems and governments are able to function, as many nations are quite reliant from taxpayer money to prop up their systems of governance and infrastructure. This is especially true in countries whose political cultures place more of an emphasis on providing a robust system of welfare for their citizens, like the Nordic countries. In Sweden, for example, the average individual pays around 57% of their income in tax.

Compare this to ancient Greece and Rome. There were taxes on consumption, but generally speaking, the most important form of taxation in those times were tariffs. Tariffs are taxes on goods that are imported, which makes sense, as these ancient societies traded very heavily with other parts of the world. The types of taxation did vary somewhat though, depending on the circumstances. For example, there were often temporary taxes implemented on property in the Roman Empire during times of war in order to raise the necessary funds to maintain the war effort.

There were also other forms of taxation in ancient Rome, such as inheritance tax and sales tax. The sales tax was introduced during the reign of Julius Caesar. During this time, people were contracted to collect the taxes and bring them to the relevant institution. They received their payment in a share of the tax money. Later on, civil servants were given the role of collecting taxes for the Roman Empire. These early precedents for forms of taxation are still influential in some sense today.

In the Middle Ages, the first examples of income tax were implemented in some parts of Germany and Italy. In these areas, wealthy citizens were expected to assess their income and subsequently pay some form of income tax if it was considered to be justified in their case. Direct taxation was also implemented, which meant that non-wealthy members of society were all taxed at a flat rate. Such taxes are largely the basis of the systems of taxation that much of the modern world uses today.

In American history, taxes are a more recent phenomenon than in other parts of the Western world. The first example of taxation in the US is arguably that of the estate tax. This was not consistently enforced, but it has changed depending on the need for public support for government efforts. For example, if there was a war on, then the government would often reintroduce the estate tax in order to raise the necessary funds to support their campaign. Income taxes, which are largely the basis for the taxation system, were first seen in the early 1900s, with the adoption of the corporate income tax in 1909. A few years later, the federal income tax on individuals was introduced, in 1913.

In the 1920s, a host of other types of taxes were also adopted at a state level. Sales taxes were slowly introduced and taken up by different states throughout the decade.

Now, there are many different forms of taxes that are implemented both at a state and federal level throughout the USA. It is important to note that taxation varies widely from state to state in the USA, due to the federal system of government. For example, a resident of California may be subject to an income tax rate of 13%, whereas a resident of Washington does not need to pay direct income tax at all. However, they may pay much higher taxes on their property, or a resident of Florida pays a higher rate of taxes on gasoline.

Taxes have also varied throughout history, and they tend in a sense to reflect the political or cultural trends of the times. For example, goods that have been historically considered sinful in some way have been heavily taxed at times, in order to dissuade people from using or purchasing them. This has especially been the case with alcohol, which led to the development of a culture in parts of southern America where people have brewed their own alcohol as a result of heavy taxes or bans on the substance.

Cigarettes are another product that have been heavily taxed as a result of this attitude, though the amount that they have been taxed at has varied heavily from state to state. Though this is still the case today, the argument now tends also to have a lot to do with the health effects of a particular substance. In this sense, taxes can be used as a way of changing the behavior of the public without outright banning something. Through taxation, a substance or product can become so prohibitively expensive that many people stop purchasing or using the product, though it is not actually illegal to do so. This is the reason that alcohol is taxed very highly by the governments in Scandinavia, as it is thought to be an effective way to combat alcoholism or excessive drinking.

What are Taxes and How do Taxes in the US Work?

Very broadly speaking, taxes are money that are given to a public body or institution. The idea is that the money is collected in order to pay for the services that that institution provides. The institution is generally some type of government, and the collection is mandatory. This means that someone who lives within the area of governance does not get to choose whether or not they pay taxes, and it is enforced that they pay taxes. As such, if they fail to pay their taxes on time or do so incorrectly, there are usually legal or criminal consequences.

In the US, the system of tax is ‘progressive.’ This means that people are charged different amounts, depending on their earnings and assets. Someone who makes a relatively small amount of money may pay no tax at all, and someone who is a high earner may end up paying almost half of their income. The concept behind this is that everybody pays what they are able to and that people who have more to give are therefore able to contribute more financially to the society that they live in than people who earn less.

Your income, which is the money that is taxed by the government, is the money that you earn throughout the year. In many cases, this money is automatically taxed by your employer, who takes out the amount that is eligible to be taxed on from your paycheck. This means you do not have to take the money out yourself and then figure out what percentage of your pay is eligible to be taxed, which can be complicated. However, it also prevents people from evading their tax responsibilities and paying less tax than they actually owe, for example. It is also important to note that it is not just money you earn from your employment that is considered income. If you win some money in the lottery, the government also considers that a form of income, and you can therefore be taxed on it too.

One potential exception to this is money that you earn from trading stocks. If you are able to make a profit doing so, the government does not actually consider this to be income. It is instead classed as a capital gain, and you do not have to pay taxes on it. There are therefore many people in the US who are able to become very wealthy through trading stocks, as some of them are able to predict trends in the market well and independently generate a lot of money selling stocks that suddenly become very valuable.

Who Has to Pay Taxes?

All citizens of voting age in the US who earn a certain amount of income generally have to pay taxes. However, it is not just individuals who must pay taxes in the US. Companies must also pay taxes, but the way the amount they must pay is calculated differs from that of individuals in the US. Companies are not actually taxed on their income, but they are taxed on their profits. There are also exceptions made on what are referred to as business expenses, which do not need to be taxed. Basically, companies can claim that a certain amount of their income is not actually a profit because the money was used on business expenses, and this means that the amount they can legally be taxed on is less than if they had not used that money as a business expense.

This is somewhat controversial, as there are many, many different ways that companies can write off part of their income on business expenses. Individuals are, of course, not allowed to do so with their personal income, so many feel that it is not entirely just that companies get to do so because some believe that many major companies pay a fraction of what they should in taxes, largely due to their claiming business expenses. The taxation system in the US is somewhat unique because of how little large corporations pay in comparison to what they would have to pay in many other countries in the world. This makes the US a very alluring place to start a business for many, especially given how strong the economy is too. However, it also means that more of the tax burden falls on the individual than it potentially could if companies and corporations were taxed slightly differently. 

How to Hit Tax Filing Deadlines

Tax time is the highlight of the year for the majority of people. The extra income is exactly what you have been waiting for to do something fun, like a weekend getaway. People often begin to scramble at this time of the year; however, staying prepared all year long can ensure a successful tax filing season. Being prepared may take some effort, but it will be worth it in the long run. You may have questions lingering in your head about the tax deadline and how to make sure you can be prepared. No worries! Below, this article discusses all the tips and tricks you need to have a successful tax season.

All About the Deadline

The official tax deadline has been the same date for over 30 years. If the date falls on a weekend day (Saturday or Sunday) or a holiday, the deadline is then moved to the next business day (Monday through Friday). Often, extensive facilities like the IRS (International Revenue Service) are only open Monday through Friday until 5 pm. 

The official deadline date is April 15th, 2020, for this year. As mentioned before, this is the usual deadline date, unless something was to interfere.

The Filing Period

Even though most employers give out your tax forms early in the year, you may want to wait until the filing date. This year, the filing date is January 27th and is when people receive their refunds the quickest. A good rule to remember is that the sooner you turn it in, the quicker you receive your money. When thinking logically, if you wait until March to file your taxes, you may not receive the refund until after the deadline date. Most of the population waits until closer to the deadline date to register because they need to refrain from spending their tax income too fast. 

If budgeting is the reason you are holding off on filing, then consider a payment plan option with your tax company. Not every agency offers payment plans, but some agencies only use this method upon request. Even if your chosen agency doesn’t provide this option, there are various methods to discuss with them if spending is your issue.

An excellent idea to help you decide on when to file can be the fact of what you want to do with your money. Do you need a new couch because the new dog ruined it, or are you planning a small family vacation? No matter what you decide to do with your money, filing at the right time can help make your goals a success. If a holiday is your choice, then possibly wait until the end of February so that you can receive the money near the time of the vacation. Americans sometimes have trouble saving significant sums of money.

Problems with Filing Too Late

What happens if you file after the deadline? If you already have an idea that you won’t be able to make the deadline, there is an option to file an extension. Requesting a six-month extension can be done by submitting a 4868. Then, hold onto your regular tax return forms until you get a response. No matter when you file the extension, it’s set to six months from the April 15th deadline. In this period, you can register your original tax return at any given time.

There are many other different penalties if you don’t file your taxes on time. The worst punishment requires you to pay 5% of your unpaid taxes for each month your file is late. The penalty begins a few days after the deadline period. The IRS then gives you up to 60 days before they bill you with $140 or the amount you owe.

What happens if you don’t pay? When you don’t pay, the situation only worsens. You then receive another penalty and even more bills. Some acts protect anyone from paying more than 5% a month of what they owe. The only issue seen with these acts is the fact that the amount you owe can take much longer to pay off.

Even if you cannot afford to pay your taxes, you should still file. Think of it like this. Filing is better looking on your bank statement, rather than facing penalties and paying almost a third more than what you owe. Remember, you can also request a six-month extension!

Receiving Tax Income

The best part about tax season for some people is that they get some money back! If you file within the deadline period, you can expect a time frame of 21 days or less for receiving your refund. However, some attributes require a more extended receiving period.

Some people don’t believe in filing electronically and prefer to send their forms in by mail. Submitting the forms in by mail is a great alternative, except your tax return may take up to six weeks to earn anything back.

Another aspect that can affect the time limit on drawing your tax return is whether you choose to get your payment in a check or a direct deposit. The majority of people prefer direct deposit so they do not have to worry about any more paperwork. Typically, the older generations prefer a check so they can inspect the breakdown of their tax return. If you choose to accept a paper check, do not expect it until 31 days after filing. The 10 days is considered a grace period for postal services. More than likely, it should only take three to five business days to arrive.

How to Stay on Track

Whether you must pay each year or simply file a tax return, it is crucial to be prepared all year long. The tax filing process can take longer if you are not already prepared. Here are some tips and tricks to ensure your readiness for the tax season.

Organization

Staying organized is a task people often find to be complicated. When it comes to your tax information, you need to make sure you are keeping track of every little thing. If you are striving to be an elite organizer, you should consider the following: keep every receipt throughout the year; create a filing system for categories like groceries or bills; and invest in a finance book to sort out your bills each month.

It sounds like a lot, but this is the best way to keep track of where your money has gone all year. If you find yourself looking at your bank statement, wondering where your entire paycheck went, try these methods. Even if you are struggling to budget monthly expenses, take the extra time to file everything.

Taking the time to do some math at the end of each month is also a way to make the filing process go much smoother. Not only will it be more seamless for you, but also your tax agent. Being able to take some of the workload of your tax agent can have a positive outlook when filing your tax return or paying in.

If that much extra work scares you, then consider becoming an amateur at staying organized. Simply, you must file your bills and keep receipts from personal expenses. The best way to achieve this is to grab a box that has a lid and paperclip items by months. At the end of the year, sort out the papers and do a little math to prep for filing. Even this method can seem hectic to try and get it all sorted in one weekend!

Are you just trying to get the tax return filed? If you are not looking to do any added work, then relax through the year and submit your forms when the time comes. However, if you are someone who pays in on taxes, this is most definitely not the best option for you. When it comes to paying in, the more organized, the better.

Paycheck Inspection

Some people may find this odd, but paying attention to the tax withheld out of each check can give you an idea of what your refund may be. It is common to ask your employer about the ratio or tax percentage that comes out of each check week or biweekly. Inspecting the taxes withheld on your paycheck is a good routine and something to keep track of. The best advice is to buy a small notebook and paperclip each stub on one sheet of paper. Then calculate the amount withheld from each check and add it up at the end of each month. Therefore, you can have an idea of what to expect back at the end of the year.  

Itemize Deductions

The last trick to staying on top of your financial records is itemizing your deductions. Create time to review tax credits and deductions to see how many applications are in your situation. Pay very close attention to the tax credits, and they provide a dollar for dollar decrease to your tax bills, therefore, saving you from having to itemize or claim them. Keeping track of small details like this can ensure a breezy tax season.

All in all, the tax season is usually a happy time for most people. Sometimes, when looking at your check, it may bring your mood down a couple of notches. The taxes that are taken from each check can make you feel as if you are being robbed blind. However, at the end of the year, that large chunk of money missing from your pay stubs is coming back. Your taxes are a great way to learn budgeting habits and create good spending traits.

Be sure not to file too late. No one wants to have to back pay on their taxes. You may have to pay up to twice the original amount you owed.

How to File Taxes for Beginners

Everyone has a certain level of tax liability, and the filing of your taxes simply helps you to understand your own. Tax liability refers to the amount of debt that is owed by any one individual in the form of taxes. Additionally, filing allows you to schedule all your required payments, and it even allows you to request refunds where applicable. There are cases where there has been an overpayment, and the refund simply balances things out by returning the excess portion to you.

The income that is reported can fall under several categories, such as capital gains, interest, salaries, or any other profitable venture. Filing must be done by both individuals and businesses that have an income to report that falls under any of the stipulated categories.

The frequency of filing depends on your country of residence. In most cases, however, the filing is done annually.

Your tax returns are filed to the stipulated entity that corresponds to your location. In the United States, there are two potential alternatives. The first is a tax collection agency that falls under the purview of either local or state government. The second, and arguably more common, is the Internal Revenue Service (IRS). The forms you use can be created by any of these tax collection entities.

Tax Return Breakdown

The tax return starts with the provision of all relevant personal information by the taxpayer. This includes personal information, dependent information, and the applicable filing status. There are three subdivisions to a tax return

Income Section

As the name implies, this is where all sources of income are listed. The W-2 tax form is the most popular reporting tool in this regard. This form is also known as the Wage and Tax Statement. Employers are mandated to send this document to all their employees and to the IRS at the close of each year.

This form illustrates the annual salary of the employee and the amount of tax that is withheld from the employee’s paycheck. Some people pay their own taxes, but others don’t need to because their employers use salary deductions to pay taxes to the government on their behalf. Employees who fall under the latter category are W-2 employees.

All forms of income must be reported, such as capital gains, royalties (not applicable in all countries), self-employment income, dividends, and salaries.

Deduction Section

Deduction requirements are not consistent across jurisdictions, which is the reason for the immense variety. These deductions lower a taxpayer’s tax liability. This is achieved by lowering a person’s taxable income. These deductions are expenses that the person deals with throughout the year.

These expenses are subtracted from a person’s gross income, which yields a figure illustrating the amount of tax owed to the government. Of course, not every expense is considered a deduction. If that were the case, then your taxable income would be based on whatever you managed to save for the year.

Deductions can either be standard or itemized. Standard deductions are flat fees paid for the year that are calculated based on your situation. For example, single taxpayers would pay $12,400, while married taxpayers would pay $24,800 if they file jointly for the 2020 tax period. Itemized deductions are based on certain specific expenses, such as mortgage interest, property taxes, dental bills, etc.

A taxpayer can choose to use standard or itemized deductions. The choice is usually made based on which results in more favorable deductions, though there are some people who make the choice based on convenience. Standard deductions are easier to deal with because the rate is flat and set. If you choose to go the itemized deduction route, then you must calculate all the relevant expenses for the deductions to be accurate. Business expenses are almost always deductible.

Once the deduction cost is calculated, it is then subtracted from gross income, which helps to determine the tax rate. This rate is, of course, based on the adjusted gross income figure.

Tax Credit Section

These are figures that help to offset the taxes owed and tax liabilities. Applicable tax credit varies greatly based on your jurisdiction. Tax credit tends to depend on certain necessities, such as care for dependent children and seniors, education, pensions, etc.

Once income, deductions, and credits are sufficiently reported, the return is ended by the taxpayer. This conclusion provides either the amount that is owed or the excess amount that is a result of an overpayment.

While overpaid taxes can be refunded, they may also just be rolled over into the following tax year. Payment remittance can be done as scheduled tax payments, or they can be done by paying a single sum. Tax payments can be a burden, so many self-employed people make a quarterly advance payment to make things more bearable.

Filing Your Tax Return

Now that you are familiar with all the concepts that revolve around filing, it is time to look at the process involved.

The Need to File

First, you need to know whether you need to file a tax return at all. For most people, this question is an emphatic yes. However, you should still be certain before you start burning time with an unnecessary process.

There are several factors that go into it, such as:

  • Your filing status
  • Your age
  • Your income being equal to or greater than the established thresholds
  • Your being self-employed with a net income of at least $400
  • Your receipt of distributions from accounts such as an Archer Medical Savings Account
  • Your owing of taxes on tax-favored accounts
  • Your owing of taxes on household employees

Of course, there are other factors too, and some of these factors can even contradict. For example, you may think you don’t need to file taxes because you’re legally a minor, but you may still be required to because of your level of income.

Many people still file even when they find out that they don’t have to, as you could end up with a beneficial tax break down the line.

Gather Your Data

After you’ve determined your need to file, it’s time to round up some information. Even if you’ve hired someone to prepare your tax return, you still need to be involved here. At this step, you need to pull together all proof of income, tax-deductible expenses, or anything that could potentially yield a tax credit. Here’s a checklist you can use for what you need:

  • Social Security numbers of you, your dependents if you have any, and your spouse
  • Your W-2 form
  • Your 1099 form
  • Contributions to a retirement account
  • Medical bills with outstanding reimbursements
  • Mortgage interest
  • Property taxes
  • Education expenses
  • Paid local and state taxes
  • Tax returns for the previous year
  • Donations to charity

Choose Your Form(s)

One of the most important pieces of the puzzle is choosing the form(s) that apply to your unique situation, so your tax filing process is done adequately. You can check out all the forms in detail and their purposes to find out the extent to which they apply to you.

DIY or Professional?

Filing your tax return is a process that you are more than capable of doing on your own. Be that as it may, you may find the process to be arduous and tedious. Typically, tax software is used if you’re doing it on your own. There are many software alternatives that you can take advantage of. In fact, there are many top-tier tax software providers that are willing to give free versions of their software if your tax situation is simple. The IRS also gives free software to those who have an adjusted gross income that is less than $69,000.

It’s best to do the filing on your own in most situations. However, you may want to consider hiring a professional if any of the following applies to you:

  • You own a business, or you have secondary sources of income
  • You find the forms you receive in the mail hard to understand
  • You need tax advice and strategic planning

Use Free Tax Help

While not everyone qualifies for free tax help, it’s something that you should jump at the chance to use if you do qualify. There are two main programs that offer free tax preparation services. These are the Volunteer Income Tax Assistance (VITA) program and the Tax Counseling for the Elderly (TCE) program.

The people who qualify for either of these programs usually only speak limited English, make $56,000 or less, are older than 60, or have disabilities.

Prepare Early

It’s always advisable to start your tax-filing in advance. Once you get into the late bracket, you start throwing money away, which is just a waste. Consider the following:

  • All outstanding payments have interest applied if they are not paid by the designated April deadline. This is a 5% or 6% interest rate per annum.
  • There may also be a 0.5% late-payment penalty monthly up to 25%
  • If the return itself is filed late, there is a penalty that is equal to 5% of your due monthly payment, with a maximum of 25%

Manage Your Tax Situation

You don’t want big swings in either the payment or refund direction. If you must pay a large sum to the IRS in April, you may want to consider having more tax withheld from your paycheck. Likewise, if your refund is huge, then you may want to consider lowering the amount that is deducted from your paycheck monthly.

Top 7 Strategies to Protect Your Income from Taxes

Sometimes nothing is more depressing than seeing how much of your paycheck is going to taxes each year. But there are many ways to keep more of your income and lower your overall tax liability. It goes without saying that you should always pay every penny that you owe to the government, but you should never pay more than you have to. Below we’ll go over the top seven strategies to protect your income from taxes.

1. Retirement Accounts

The first strategy to put into place when you want to protect your income from taxes is to set up a tax-deferred retirement account. The most popular of these include a 401(k), an IRA, or a Roth IRA.

In 2020, you can contribute up to $6,000 to a traditional IRA, or a Roth IRA, or $7,000 if you’re at least 50 years old. In a traditional IRA, the contribution is tax-free, as the tax is deferred until retirement. A traditional IRA works most effectively if you believe you will be in a lower tax bracket in retirement. With a Roth IRA, you can withdraw your money tax-free when you retire. A Roth IRA works best if you believe you will be in a higher tax bracket during retirement.

2. Open a Health Savings Account

Opening an HSA (Health Savings Account) is a great way to reduce your tax liability if you have a high-deductible health plan. An HSA allows you to set aside money each year that you estimate you’ll have to use for medical expenses. The HSA then lets you use nontaxable dollars to cover your out of pocket expenses for the year.

In 2020, the limit for depositing into a health savings account went up by $50. The maximum you can contribute now is $3,550 for an individual or $7,100 for a family.

Families can also receive tax credits to help with paying for college. The American Opportunity Tax Credit has only been around since 2009 and provides qualifying families with up to $2,500 for higher education. Qualifying students can receive 100% of the first $2,000 they spend on materials for school and a credit for 25% of the next $2,000 they spend (0.25 x $2,000 = $500).

3. IRS Tax Credits

The IRS offers multiple tax credits that you may be able to take advantage of. The Earned Income Tax Credit ranges from $529 as an individual to $6,557 for a parent of three kids. Some people may believe they don’t qualify for this credit, but it does not apply to only low-income families. Many people considered “middle class” can receive this credit if they lost a job, took a pay cut, or worked fewer hours during the year. As many as 25% of people who qualified for this tax credit do not claim it.

Another way to save your income from taxes is the Child Tax Credit. If you have dependents under 17 years old, you qualify for the Child Tax Credit. The credit can vary from year to year, but in 2020, the credit is $2,000 per child.

The last IRS tax opportunity you may be able to take advantage of is the Retirement Savings Contributions Credit, also known as the Saver’s Credit. To be eligible for this credit, you must be 18 or older, not a full-time student, and not claimed as a dependent on another return. The total of the credit depends on your adjusted gross income. The amount of the credit could be 50%, 20%, or 10% of the total contributions made to a retirement plan.

4. Open a College Savings Account

A college savings account, officially known as a 529 plan, allows for multiple tax benefits. Any interest earned from this account is tax-free when being used for educational purposes, and qualified withdrawals are not subject to federal taxes.

Each state has different rules governing their 529 plans, with some offering further tax deductions. Pennsylvania, for example, allows you to deduct up to $30,000 worth of contributions for a married couple, or $15,000 for individuals.

5. Capital Gains Protection

When you invest money, it should be for the long haul. And if you’re holding onto your stocks and mutual funds, you receive advantageous treatment for taxes on long-term capital gains. As long as you hold onto your investment for more than one year, the tax rate on your capital gains when you sell an asset is 0%, 15%, or 20% depending on how much money you make. A married couple making less than a combined $78,750 owes 0% on their capital gains.

Also, when you sell a house, you do not have to pay capital gains up to $250,000 as an individual or up to $500,000 as a married couple.

6. Buy a Home

One of the benefits of buying a house rather than renting is that several tax deductions become available to you. When you own real estate, your real estate taxes, mortgage insurance premiums, and mortgage interest are all tax-deductible. Also, you can deduct any sales paid on your purchase if you buy a modular or manufactured home or on building materials for new construction.

Buying a home does come with many added expenses that renters do not have to pay. But eventually, you will own your home outright and have a tremendous asset on your hands, rather than a bunch of moving boxes. And as we went over above, when you sell your home, you do not have to pay capital gains on the sale up to $250,000 as an individual or up to $500,000 if you’re married.

7. Municipal Bonds

Municipal bonds are attractive to investors due to deferred tax-free interest payments. An example of buying a municipal bond is when you lend money to a state which will pay out a set amount of interest payments over a specified period.

Municipal bonds are exempt from federal taxes. Check your local state laws to see if municipal bonds are exempt from local taxes as well.

How Much Do You Need to Make to File Taxes?

There are many things in life that we can reliably count on to be there year after year, and one of the most useful, yet irritating, of these things are taxes. Whether you live in a small town, the big city, or are hopping around the world traveling, you can be assured that the government is going to come calling for you to pay those pesky taxes. There are quite a few people who, through a host of systems, as well as your annual income, may be able to opt-out of filing their income taxes at the end of the year. We are going to dive into all the regulations that you must know whether you choose to file your tax returns or not this coming year.

Plan Early for Your Taxes

The most important advice we can give everyone regarding doing their taxes is to start preparing way in advance. You do not want to have to rush things and make mistakes that may cost you hundreds or possibly thousands of dollars. Even if you are sure you do not have to file a tax claim, having all your information organized is a must in case some issues pop up.

How Much Do You Need to Make Annually to Have to File?

There is a myriad of factors that go into whether you must file an income tax return at the end of the year, with your annual earnings, marital status, age, and a host of other factors playing a part. Whether you make enough to go over the first bracket of taxes is dependent on how you file your taxes. There is a filing system in place that separates everyone into categories, each with their own set of rules. Here is what you need to know.

Which Filing System Do You Fall Under?

Single

If you are not in a legally binding relationship and are currently under the age of 65, the minimum gross income you must make annually to have to file an income tax return is $12,200. On the other hand, if you are over the age of 65 and single, then that number jumps up to $13,850.

Married and Filing Taxes Together

When filing your taxes jointly, the age of you and your partner is taken into consideration. Once that is done, those under the age of 65 need to make roughly $24,400 together to have to file a claim. If both partners are over the age of 65, then that total goes up to $27,000. If only one partner is over the age of 65, then the price goes down a bit to $25,700.

Married but Filing Your Taxes Separately

For some reason, the government has decided that any married couple who is filing their taxes separately must do so as long as they make a gross annual income of a mighty $5. Yes, it is a bit strange, but there you have it.

Recent Widowers

For those whose spouse has passed away within the current tax year and have a dependent child, the government allows you to continue filing your taxes within the jointly married category. The age difference rule still holds, with those being both under the age of 65 having to make $24,400, $25,700 with one partner under 65, and $27,000 when both are over the age of 65.

Heads of Households

If you happen to fall under the head of a household status and choose to file your taxes under said category, you must make at least $18,350 a year if you are under 65 years of age, with that amount jumping to $20,000 a year if you are past the age of 65.

Dependent in a Household

There are a few factors that go into whether someone who has been claimed as a dependent in a household still needs to file a tax return: whether or not you earned income within the year; any passive income you may have generated; and the gross annual income you earned. After that, the same principals of age come into play, as well as whether you happen to be blind.

Single, Under the Age of 65, and Not Blind

If you fall into this category, you are only required to pay taxes under a few circumstances. The first being that you made more than $1,100 in passive income. Secondly, if you worked and earned over $12,200 within the year. Thirdly, if your gross income was higher than either the $1,100 in passive income or if you made over $11,850 in the year.

Single, Over the Age of 65, or Blind

There is some shift in whether you must file a claim once you are over the age of 65 or happen to be blind. If you’re making more than $2,750 passively, working and making more than $13,850, or if your gross income was higher than $2,750 or more than your earned income of $11,850 plus $2,000, you’ll have to file.

Single, Over the Age of 65, and Blind

If you happen to be both blind and over the age of 65, you are required to file a tax return if your passive income generated over $4,400. Earned income must reach over $15,500, or your gross income must be higher than the $4,400 passive income or $11,850 plus $3,650.

Married, Under the Age of 65, not Blind

Those who are married must keep in mind these factors when filing their taxes. If you make more than $1,100 in passive income, you must file a tax return. Those earning over $12,200, or who have a gross income of above $11,850 plus $350, must file as well. If you and your partner have chosen to file your taxes separately, then you must file a tax return if you made over $5 within the year.

Married, Dependent, 65 and older, or Blind

If you made more than $2,400 in passive income, you must file your taxes. Those who have a job and earn over $13,500 must file as well. If your gross income was larger than either the $2,400 passive income or you earned above $11,850 plus $1,650, then you must file also. Again, anyone filing separately from their spouse must file a tax return if they made above $5.

Married, Dependent, Over 65, and Blind

Those earning above $3,700 in passive income have to file a tax return. After that, if you earned more than $14,800 from work, you qualify as well. Those with a gross income of higher than $3,700 passively or an earned income above $11,850 plus $2,950 must file also. Yet again, do not forget that if you choose to file separately from your spouse, if you make above $5 in the year you must file your taxes.

Self-Employed

For those who are self-employed, if you happen to make over $400, then you are required to file a tax return with the IRS.

Students

Families can list you as a dependent up until the age of 19, but for those who choose to continue their education, the government allows families to claim their children as dependents up until the age of 24. If you happen to be claimed as a dependent, look above at the regulations to find out whether you fall into a category that requires you to file your tax returns. For those who do not fall into the eligible categories, it may sometimes be of benefit to file them regardless, as you may be able to deduct some money due to being a student or get tax credits that are afforded by the government to students.

Those Receiving Social Security Benefits

If you happen to be receiving social security benefits, you are not required to file a tax return, unless you happen to fall under some of the categories above in terms of passive or earned income, or if you are married and choose to file your taxes separately from your partner. Generally, only a percentage of your social security money is considered taxable depending on which category you fall into.

Should You File If You Don’t Need To?

Some situations warrant filing your tax returns, even if you do not fall under any of the categories written above. For example, if you happen to have had too many funds withheld on your federal taxes and wish to receive a refund, the only way to do so is to file your tax returns. If you choose not to do so, the IRS does not automatically refund you, and the money you may have gotten is lost. Those who have health insurance from a federal or state marketplace are required to file tax returns as well.

Taxes Everywhere

The government has created an interesting system that allows many of America’s low-income earners to opt-out of filing income taxes every year, with deductions, tax credits, and other systems helping save money. With close to 50 percent of most Americans not making enough money per year to require filing a tax return, it’s no wonder the payroll taxes are so high. Most of the Medicare, social security, and unemployment insurance available to most around the country comes from the taxes everyone pays through their earned income. For those who must pay taxes this year, the deadline for 2020 is Wednesday, April 15th.

To Summarize:

  • Remember to check over every category to make sure you are not required by law to file a tax return.
  • If you are not required, there may still be some benefit to filing your taxes.
  • Students may receive school-related benefits, such as tax credits and refunds.
  • Whether you are married and filing separately can play a big role in whether you need to file a tax return.
  • Self-employed individuals must file taxes when generating over $400 a year in income.
  • Those receiving social security generally do not have to file taxes, but there are some situations that warrant it.
  • Whether or not you are required to pay taxes or simply choosing to, planning in advance so that you don’t make any mistakes that cost you money and time is paramount.

A Guide to Doing Your Taxes

Maybe tax time is approaching, and this year is the first time you have to file your taxes. You may need to do a different type of tax return than you have before. Whatever the case may be, doing your taxes can be time-consuming and difficult, and people are often worried that they may do it wrong because of the consequences involved in this. This article covers the main types of taxation in the US for individuals and businesses and the ways in which you can do your taxes. It also goes over some considerations you should make and how you can make the process easier on yourself.

The process of filing one’s taxes can broadly be separated into three different methods. If you have an employer in the US, they likely handle your income tax for you by deducting it from what they pay you before you receive it. Therefore, if you are in that type of employment, you do not need to worry about filing your own income tax. However, there are many other situations where you need to file taxes. Broadly, the ways in which you can file your taxes can be separated like this:

  • With an accountant or financial manager: This is a great way to go about filing your taxes if you have money to spare and would rather take the headache out of the process. Someone goes through the process of filing the taxes for you, and all that is needed on your part is to provide them with the information and documents they ask for. However, this option is of course more expensive than going through the process yourself.
  • Filling out the tax return form yourself: This is obviously not as convenient as having somebody else fill out the form for you, and it may not be advised if you have an especially complicated situation with regards to your taxation. However, if you know exactly what you need to do, then it isn’t too much of a problem to file your taxes yourself, as long as you ensure that you fill out all of the required information and submit it by the deadline.
  • Using tax return software: This is something of a happy medium between finding professional help in filing your taxes and doing it yourself. You generally need to pay for the service, but it costs less than hiring the services of a professional to file your returns for you. It is also worth mentioning that some of this software is now free, as long as your case or paperwork isn’t overly complicated. The software generally runs you through different questions to understand what you need from them and then fills out the 1040 form for you. If you choose, they can also submit the paperwork in some cases.

How Much Tax Do I Need to Pay?

The amount of tax you need to pay and the types of tax you need to pay vary greatly depending on your personal and financial circumstances. It also varies depending on what state you live in, as different states have different laws or policies with regard to different kinds of taxes. However, it is generally speaking not too difficult to figure out how much of your income is going to be deducted by the federal government.

In the US, the system of taxation is progressive. This means that the more money you earn, the greater the percentage of your income is eligible to be taxed. Other factors also affect how you are taxed. For example, if you are married and/or have children, this can mean that you are required to pay less tax or can potentially receive exemptions, depending on your circumstances. The nature of the US taxation system at the federal level means that your rate of income tax is based on which tax bracket you fall into. For example, as of 2019, the tax bracket between $84,201 to $160,725 is where people are taxed at 24%.

While your employer deducts the income that they pay you from your wages, this does not mean you do not have to file anything yourself. They provide you with a form around tax time called a W-2. This form displays information including what you have been paid and what they have taken out of your wages in the form of tax and other important details. You need to use this information in conjunction with anything else you know in order to figure out exactly how much you owe in tax and how you can file your return. If you are self-employed, you need to go through a different process, and there are different kinds of paperwork involved. If you have also accrued income through investment or bank accounts, for example, they may also choose to send you documentation of this, which needs to be filed too.

If you are self-employed or work as a type of contractor, you likely need to use a 1099 form to file your taxes. It is more common today than ever to work as a contractor or as a self-employed person, and entrepreneurship is also on the rise. Such work is generally not taxed at the time that it is done, of course, so this means that it is often necessary for the self-employed person or contractor to file their own taxes and report their income at tax time. Self-employed workers generally receive a 1099 form from their clients, which is a form that discloses various kinds of relevant information so that the self-employed worker can more accurately report their income at tax time.

There is a great variety of types of work that 1099 forms have to be issued for, so do not worry too much if you have received one and were not expecting to. For example, 1099 forms are often also relevant to agricultural transactions. Generally speaking, they are issued if the value of the transaction in any way comes to $600 or more, and the party whose services have been rendered or used are not an employee of or employed by the person who paid for the services.

The types of 1099 forms vary depending on the type of work that has been done and also the types of assets that need to be reported. For example, there is a separate type of 1099 form for dealing strictly with dividends. This can make the process of filing and properly going through the 1099 form quite complicated and tiring. If you are not sure entirely of what kind of income and assets you should be reporting, then it is best to consult with an expert on this matter. Filing your taxes incorrectly can be a crime, so it is best not to take any chances if you do not feel comfortable.

Deductions and What They Mean

There are many different factors that affect how much tax you need to pay. One such factor is deductions and whether or not you are eligible for any. Deductions reduce the amount of your income that is taxable, and they may therefore mean you fall into a different tax bracket, despite the fact that your income is the same. Payments to charity are one example of a deductible transaction. For example, if you pay $5,000 to charities across the US, then that same amount may be considered a deduction and taken out of your taxable income.

One deduction that almost everybody is eligible for is the standard deduction. Your standard deduction varies depending on your living situation and other factors, as well as the tax bracket that you fall into. It also takes into account other things, like whether or not you are disabled and how old you are. If you are over a certain age or are blind, then you are automatically eligible for another deduction on top of the standard deduction. The idea behind the deductions is that they make it easier for people to live and relieve some financial pressure on individuals and families.

Final Calculations You May Need to Make

Once you’ve finished doing all the relevant paperwork, it should be fairly easy to determine your position and situation in terms of your taxes. You may end up owing money in some form, and if this is the case, it is generally fairly straightforward to simply pay the balance to the relevant government department. On the other hand, you might find that you are actually owed money, and if this is the case, then you generally receive several different options as to how you can receive this.

You may find that once you have finished calculating your income and money owed that you actually owe more to the government than you are able to pay all at once. This is not unusual, and it is not necessarily any cause for concern. There are generally payment plans and options available to people in such situations, and you should therefore be able to pay the balance in installments, which relieves much of the financial pressure of suddenly realizing that you owe an unexpected sum of money!

Paying taxes is not enjoyable, but it is a necessary part of life in almost all countries around the world, and the US is no exception. Remember that doing so incorrectly can be considered a crime in many circumstances, and as such, it is imperative that you do so correctly. If you are in any doubt as to your responsibilities or rights, you should get in touch with the relevant government department or an accountant. They should be able to help you get on track in terms of what and how much you need to pay, and they should also be able to help you to understand other elements of the taxation system, like deductions. It is always better to be safe than sorry when it comes to your finances.