Understand Your Taxes

Taxes are more than just a seasonal obligation; they are the foundation of our shared public services, infrastructure, and social programs

What are taxes and why we pay them

Taxes are mandatory payments that individuals and business make to the government. These funds are used to pay for public services and programs that benefit society as a whole.

In the United States, taxes are collected by the federal, state and local governments.

Taxes fund the systems and services that keep the country running. Without them governments would not be able to provide essential public goods. Like roads, highways, public schools, emergency services and social programs. Taxes is how society pools resources together to pay for things we all need. You will notice on your paycheck that your employer takes a portion of it and sends it directly to the government this is an estimated amount that you owe.

The most common Types of Tax

Income Tax: paid on the money you earn

Sales Tax: paid when you buy goods and services

Property Tax: paid by homeowners based on their property value

Tax brackets explained

Most people who earn income in the United States are required to pay taxes. However, not everyone owes the same amount. How much you pay or don't pay depends on many factors like your income, filing status and credits.

This is where terms like marginal and effective tax rates come into play .

Marginal tax rate is the rate applied to the last dollar you earn, this is usually the tax bracket people refer to when they say "I'm in the 22% tax bracket".

This is the highest bracket that a portion of your income will be taxed at.

Effective tax rate is the average percentage of your income that you actually pay in taxes. Your effective rate or the percentage you actually pay is always lower than marginal tax bracket ("I'm in the 22% bracket") because some of your income is taxed at lower brackets

Another factor that determines how much you pay in taxes is the tax bracket. This is something people are often confuse and do not really understand. We will try to help you understand it better, so you can better estimate how much you will owe, avoid panic about moving into a higher tax bracket and ultimately make smarter financial decisions on raises, bonuses and investments.

Tax brackets are income ranges that determine how much tax you pay on different portions of your income. The United Stated uses a progressive tax system-which means your income is taxed at increasing rates as it rises.

Instead of paying one flat rate on all your income, your earnings are divided into sections, and each section is taxed at a different rate.

A common misconception is that moving into a higher tax bracket means all of you income is taxed at that higher rate. That is not true, only the money above the previous bracket gets charged the higher rate.

For example

10% on the first portion of income

12% on the next portion

22% on the next portion

Here is great explanation from Charles Schwab on how tax brackets actually work

Credits and Deductions

Tax credits and tax deductions are two of the main ways people reduce how much they owe in taxes. While they both lower your tax bill they work in different ways.

A tax deduction reduces the amount of your income that is subject to tax. This means you are taxed on a smaller portion of your earning. Deductions are applied before your tax is calculated. Common deductions are student loan interest, retirement accounts contribution and mortgage interest (if itemized)

A tax credit directly reduces the amount of tax you owe, dollar for dollar. This makes credits generally more valuable tan deductions. Credits are applied after your tax is calculated.

Credits and deductions is how the tax system accounts for differences in income, family size, education costs and other financial situations. This also how the government encourages people into saving for retirement, pursuing higher education, raising children and donating to charity

Standard Deductions vs Itemized deductions

Most tax payers take the standard deduction, which is a fixed amount set each year by the IRS. It simplifies filling because you do not need to track individual expenses. However some people chose to itemize deductions if their deductible expenses add up to more than the standard deduction. Common itemized deductions include mortgage interest, state and local taxes, charitable donations and certain medical expenses

Refundable vs Non-Refundable tax credits

Not all tax credits work the same way

Refundable credits can reduce your tax bill below zero, meaning you may receive a refund even if you did not owe any taxes. Some examples are Earned Income Tax Credit (EITC)

Part of the Child Tax Credit

Nonrefundable credits can only reduce your tax bill to zero, any remainging credit is not paid out to you.

How to File

Filing your taxes may seem complicated at firs but the process is more straight forward when your break it down. Most people file their taxes once a year to report their income, deductions and credits and determine wheather they owe money or receive a refund

Before you start filing, collect all the forms that show your income and expenses. These documents are usually sent to you in January and February. Having them will make your filing process faster and help you avoid errors.

Common tax form

W-2 Shows wages from your employer

1099- NEC or 1099-MISC shows freelance or contract income

1099- INT 1099-DIV shows interest and dividends income

1098- Shows mortgage interest paid

The next information you will need varies person by person but here is a basic check list you will need besides your income forms.

Determine your filing statutes

Single

Married Filing Jointly

Married Filing Separately

Head of House Hold

Deductions and Credits

Standard Deduction or Itemized Deduction

Tax Credits such as child or education credits

Once you have all of your paperwork ready the last step is to choose how you Want to File

There are several options when filing taxes

Online tax software - guides you through the process step by step

A Tax Professional - prepares and files your taxes for you

Paper Filing - filling out forms manually and mailing them to the IRS

Filing Deadlines

For most taxpayers, the federal tax filing deadline is April 15 each year. If you need more time, you can request and extension which typically gives you until October to file your return. However, an extension to file is not an extension to pay

The IRS Offers Many Great Tax Tools

IRS Forms & Instructions

Access information on tax forms 1040, W-2 info and much more

Tax Withholding Estimator

Helps users adjust W-4 withholding

Sales Tax Deduction Calculator

Helps Itemizers estimate deductions

IRS Free File

File federal taxes online for free if you qualify

Visit

Wher's My Refund

Track your refund status