You pay them every year. You probably get a refund check, too. But do you really know how taxes work? There’s a lot you don’t think about when you fork over your hard-earned cash every paycheck.
How Do it Work?
Tax is money you pay to the government when you earn money or when you spend money. The government is supposed to use that money to pay for everything it does. Your tax dollars are used to pay for roads, public schools, police, the military, social programs, Social Security, Medicare and other government-run programs.
When we work, we earn income. The government takes a piece of that income to help pay for these things. The higher your salary, the higher your tax rate. This is called income tax.
There are two types of income tax:
- Federal: Ranges from 10%-37%
- State: Rate depends on the state.
There are seven states that don’t have an income tax:
- South Dakota
Tennessee and New Hampshire don’t tax wages.
Taxes are complicated. That’s why most of us pay some guy (or gal) behind a desk to do it for us. But, let’s be real – most people really only care about getting that sweet refund check. And paying an accountant can help you get more deductions that increase your refund. The most important thing you need to know about your taxes is that you have to pay them. No matter what.
Things People Overlook When Thinking About Taxes
Most people don’t think about their taxes. Here are some things you may have overlooked when it comes to taxes:
- All of the money you make every year is considered income. It doesn’t matter where that income came from.
- If you buy and sell stock and earn a profit from it, you will pay a capital gains tax. The amount you pay depends on how long you held the stock.
- Businesses are only taxed on their profit – not income. Businesses can get out of paying taxes by “writing off” their expenses.
- Poor people pay the most taxes. In Alabama, 1/5 of families making less than $13,000 pay nearly 11% of their income to taxes. Those who earn $229,000 or more pay less than 4%.
- If you sell stuff on eBay or Craigslist, you should pay taxes on that income.
- Even if you barter (trade) stuff or services, the IRS still says that you should pay taxes on it. You’re supposed to report the “fair market value” of your stuff or services.
- If you’re unemployed, you still have to report unemployment benefits as income.
- If you get alimony, you have to pay taxes on it. If you pay it, you can’t deduct it from your income.
To sum up: Taxes are money you pay to keep the government and its programs running. So if you make money or buy things, you pay taxes.