Understanding Income Taxes
The Fundamentals of Income Taxes
by Sarra Jackson
Tax season always seems to come around too quickly. With tax laws changing every year it can be hard to keep up. One thing is for certain: Every person, company, and non-profit organization is subject to the income tax. Although some organizations are exempt from paying taxes, they still must file a return each year. Your wages, dividends, investment profits, pensions, and interest are all considered your income. However, you are not taxed on gifts you receive, including scholarships and inheritances. Knowing the basics on income taxes can go a long way when preparing to file for taxes.
The amount of tax you pay is determined on your income. The more money you make, the more you owe in taxes due to the US having a progressive tax system. Those that make more money have a higher tax rate and those that make less have a lower tax rate. Some states have a state income tax while others only have to file a federal income tax.
Everyone has to pay taxes throughout the year. You can see how much you are giving the government on your pay stub. A tax refund is given if you have paid the government more than what you owe. However, if you haven’t paid enough then you have a balance due. It is this amount that is due by April 15th of the following year. If you do not pay this amount, then the government will charge you interest and penalties on the amount you owe. Those who are contract workers whose taxes aren’t taken out automatically are expected to pay the government the amount that they are calculated to owe.
The government does offer tax benefits to help people save money on their income taxes. Tax benefits are how Congress rewards people for making certain decisions regarding their money. For example, many people choose to put money in a retirement account, such as a 401(k), which reduces your income, so you may qualify for a lower tax rate. There are various types of tax benefits available that families can choose to do that are based on their situation.
There are many tax professionals available to help families determine if they are due a refund or if they owe money to the government. These professionals can also help you file your taxes each year since some families, such as those with adults that are self-employed, may find it difficult to understand current tax laws on their own and need help. No matter what, it is important to keep documents with any financial information in the same, safe place so when it is time to file taxes you do not have to search for them.
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