Do you know how taxes work? If not, don’t worry — you’re not alone. In fact, most people have no idea how taxes work. But it’s important to understand the basics of taxation, because it affects everything from the amount of money you take home from your paycheck to the price of the goods and services you buy.
In this taxes explained blog post, we’ll explain everything you need to know about taxes, from how they’re calculated to how they’re used by the government. By the end, you’ll have a much better understanding of this complex but vital part of our economy. Whether you are just looking for information on tax efficiency, need an understanding of the different types of taxes, or need a complete guide to how taxes work, we’re here to help you out.
What Are Taxes And How Do Taxes Work?
Firstly let’s take a look at the history of taxes, what they are and see how taxes work. Most people think of taxes as the money they pay to the government every year. But taxes are actually much more than that. They are the lifeblood of government, providing the funds necessary to pay for public services, infrastructure, and other vital functions of society.
The origins of taxation can be traced back to the earliest civilizations, where rulers demanded taxes from their subjects to pay for military campaigns, public works, and other expenses. In ancient Greece, for example, citizens were required to pay a poll tax, or head tax, to the government.
As civilizations grew and became more complex, so did the tax systems. In the Middle Ages, for instance, the feudal system in Europe required peasants to pay taxes to their lord, who in turn paid taxes to the king.
The development of the modern tax system in the Western world began in the 18th century, during the Industrial Revolution. As countries began to raise money to fund their expanding empires, they turned to taxes on income, property, and trade.
The income tax, which is levied on an individual’s or a household’s earnings, is the most common type of tax in the United States. The federal government imposes an income tax on all workers, and most states also have an income tax.
The property tax is another common type of tax. It is imposed on the value of real estate, such as a home or a piece of land. Property taxes are usually collected by local governments, such as counties and municipalities.
The federal government also imposes taxes on certain activities, such as buying and selling goods and services (the so-called “sales tax”) and smoking tobacco (the so-called “cigarette tax”).
In addition to these taxes, there are also “user fees,” which are charges for specific services, such as getting a driver’s license or using a public park.
The money collected through taxes is used to pay for a variety of public expenditures, such as national defense, education, and infrastructure. The distribution of tax revenue among these different categories is decided by the legislature. We’ll explore all the many different types of taxes and how they work further on.
The tax system in the United States is progressive, meaning that people with higher incomes pay a higher percentage of their income in taxes than people with lower incomes. The federal income tax, for example, has a graduated rate structure, with the highest earners paying a marginal rate of 37 percent on their income above a certain threshold.
How do taxes work? The tax system in the United States is also complex, with a variety of deductions, credits, and exclusions that can lower one’s tax liability. The U.S. tax code is more than 70,000 pages long, and the IRS publishes more than 1,000 forms and instructions.
Despite its complexity, the tax system in the United States is generally efficient, with most taxpayers paying their taxes on time. The IRS collects more than $3 trillion in revenue every year, and the vast majority of that money is paid voluntarily by taxpayers. But why do we pay taxes to the government? Let’s take a look…
Why Do We Pay Taxes To The Government?
Many people often wonder, why do we pay taxes? Taxes are the lifeblood of the government, providing the revenue necessary to fund its operations and pay for the goods and services it provides to the public. The government uses tax revenue to build and maintain infrastructure, provide social services, and fund national defense.
The vast majority of tax revenue comes from individual income taxes. The government also collects many different types of taxes, including those on corporate income, capital gains, and estates. These taxes make up a smaller share of total tax revenue, but they are still important sources of funding for the government.
The government spends tax revenue on a wide variety of programs and services. The largest category of spending is on Social Security and other entitlement programs, which make up about 40% of the federal budget. Other major categories of spending include national defense, healthcare, and interest on the national debt.
The distribution of tax revenue is also important. The government uses tax revenue to fund programs that benefit the whole community, such as national defense and infrastructure. But it also uses tax revenue to fund programs that help specific groups of people, such as Social Security and healthcare.
The government also redistributes tax revenue through transfer payments, such as welfare and food stamps. These programs help to reduce poverty and provide assistance to those in need.
The government collects taxes to pay for the goods and services it provides to the public. The different types of taxes and the amount of tax revenue collected vary depending on the country. In the United States, the federal government collects taxes on individual income, corporate income, capital gains, and estates. These taxes make up the majority of tax revenue collected by the government.
In 2021, the average annual taxes paid in New York stood at 11,024 U.S. dollars. Comparatively, the average amount of tax paid in West Virginia was 4,413 U.S. dollars.
Different Types Of Taxes Explained
What are the different types of taxes? The three main types of taxes are taxes on income, taxes on consumption, and taxes on wealth.
Income taxes are levied on the income of individuals and businesses. These taxes can be progressive, meaning that they take a larger percentage of income from high-income earners than from low-income earners.
Consumption taxes are levied on the purchase of goods and services. These taxes can be regressive, meaning that they take a larger percentage of income from low-income earners than from high-income earners.
Wealth taxes are levied on the value of an individual’s assets, including property, savings, and investments. These taxes can be progressive, meaning that they take a larger percentage of wealth from high-wealth individuals than from low-wealth individuals.
We’ll look at the different types of taxes explained below that fall within each of these 3 categories.
Types Of Income Taxes Explained
Personal Income Tax
Income tax in the United States is imposed by the federal, most state, and many local governments. The federal government taxes personal income with a progressive tax. Currently, the tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Taxes Explained: 2023 Federal Income Tax Brackets And Rates
Listed in the table below are the 2023 Federal income tax brackets, allowing you to easily compare how taxes work at different income levels.
Income Taxes Explained
There are many deductions and credits that can lower your tax liability. The standard deduction is $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of households. You can also deduct state and local taxes, mortgage interest, and charitable donations.
There are also a number of tax credits that can lower your tax bill. The earned income tax credit is a refundable credit for low- and moderate-income taxpayers. The Child Tax Credit is a credit for taxpayers with children. The American Opportunity Tax Credit is a credit for taxpayers with college expenses.
The IRS collects income taxes through a number of methods. The most common method is withholding taxes from your paycheck. You can also make estimated tax payments throughout the year. And finally, you can pay your taxes when you file your tax return.
State and local governments also collect income taxes, but there is a lot of variation from state to state. Some states, like Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, have no state income tax. And some cities, like New York City and Philadelphia, have a city income tax.
The amount of income tax you owe depends on your tax bracket and the amount of taxable income you have. The more taxable income you have, the higher your tax bill will be. And the higher your tax bracket, the higher your tax rate will be.
Why do we pay taxes on income? Well it is a rich source of tax income for the government. In 2018, the IRS collected $1.6 trillion in income taxes. This represented about 45% of all federal revenue. The top 1% of taxpayers (those with incomes over $515,371) paid about 39% of all income taxes. The bottom 50% of taxpayers (those with incomes below $39,375) paid about 3% of all income taxes.
Approximately 70% of taxpayers received a tax refund in 2018. The average tax refund was $2,725. The median tax refund was $1,865.
Get a complete breakdown of your wages and income taxes explained with this useful take home pay calculator.
Corporate Income Tax
Corporate income tax is a tax imposed on the taxable income of corporations. The tax is imposed on the income of the corporation, not on the shareholders. The tax is generally imposed at the federal level, but some states also impose a corporate income tax.
How do taxes work on corporate incomes? The corporate income tax is generally imposed at a flat rate. For example, the federal corporate income tax rate is 21 percent. However, some states have a graduated corporate income tax, with higher rates on corporations with higher incomes.
The corporate income tax is imposed on the corporation’s taxable income. This is the income of the corporation that is subject to tax, after deducting allowable expenses. The taxable income of a corporation is generally its gross income, minus allowable deductions.
Allowable deductions for corporations include the cost of goods sold, salaries and wages paid to employees, interest expense, taxes, and other expenses.
The corporate income tax is generally collected by the IRS from corporations. However, some states require corporations to file corporate income tax returns and make payments directly to the state tax agency.
Facts and figures on US corporate income tax:
- In 2017, US corporations paid $275 billion in federal corporate income tax.
- This is an increase from 2016, when US corporations paid $269 billion in federal corporate income tax.
- The federal corporate income tax rate is 21 percent.
- Some states have a corporate income tax, with rates ranging from 2.5 percent to 11.5 percent.
- In 2017, US corporations paid an estimated $41 billion in state corporate income taxes.
Payroll Taxes Explained
The first thing to know about payroll taxes is that they are taxes imposed on employers or employees, and are usually calculated as a percentage of the employee’s wages. Federal payroll taxes are imposed on all employers and employees, while state payroll taxes vary by state.
Payroll taxes are used to fund Social Security and Medicare, and are typically withheld from an employee’s paycheck. The employer is then responsible for matching the amount withheld and paying the total amount to the government.
The current payroll tax rate for Social Security is 6.2% for both employers and employees, while the Medicare tax rate is 1.45% for both. There are also additional payroll taxes imposed on employers in some states.
There are a few facts and figures to keep in mind when it comes to payroll taxes in the United States:
- In 2018, payroll taxes totaled $1.17 trillion
- This represented about 7% of all federal revenue
- Social Security and Medicare payroll taxes make up the majority of payroll taxes collected
- The top 1% of earners pay about 27% of all payroll taxes
- The bottom 50% of earners pay less than 3% of all payroll taxes
Capital Gains Taxes Explained
Capital gains taxes are paid on the profit from the sale of an asset, such as a stock, bond, or piece of real estate. The tax is calculated as a percentage of the asset’s sale price.
The capital gains tax is collected by the federal government, and most states also have their own capital gains taxes. The tax rate varies depending on the type of asset and the holding period (the length of time the asset was held before it was sold).
The long term capital gains tax rates are 0%, 15% or 20% depending on the taxpayer’s tax bracket. Capital gains taxes are only applied on the sale of assets held for more than one year. Assets sold within 1 year instead incur a short term capital gains tax which is equivalent to your regular income tax rate.
There are a few states that do not have a capital gains tax, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas and Wyoming.
Why do we pay taxes on capital gains? The capital gains tax is one of the most controversial taxes in the United States. Some people argue that it is unfair to tax people on their profits, while others argue that it is necessary to tax investment income in order to raise revenue.
The capital gains tax is a major source of revenue for the federal government. In 2016, capital gains taxes generated $275 billion in revenue, which is about 8% of the total revenue collected by the federal government.
The majority of capital gains taxes are paid by the top 1% of income earners. In 2016, the top 1% of earners paid 58% of all capital gains taxes.
The capital gains tax rate has varied widely over the years. It was as high as 28% in 1986, but it was lowered to 20% in 1997.
Some people argue that the capital gains tax should be abolished entirely. Others argue that it should be increased to the level it was at in the 1980s.
The capital gains tax is a complex issue, and there is no easy answer. What do you think?
Types Of Consumption Taxes Explained
Sales Taxes Explained
Sales taxes in the United States are imposed by state and local governments, not at the federal level. In most states, the sales tax is imposed on all sales of tangible personal property and certain services.
How do taxes work on sales? Sales tax is generally calculated as the purchase price of the item times the sales tax rate. For example, if an item costs $100 and the sales tax rate is 5%, the sales tax on the item would be $5.
Some states have a single sales tax rate for all items, while others have different rates for different types of items. For example, food might be taxed at a lower rate than other items. Some states also exempt certain items from sales tax, such as prescription drugs.
Most states allow local governments to collect their own sales taxes, in addition to the state sales tax. The local sales tax rate can vary depending on the locality, but is generally much lower than the state sales tax rate.
There are a few states that do not have a sales tax, including Alaska, Delaware, Montana, New Hampshire, and Oregon.
Sales taxes are generally regressive, meaning that they take a greater percentage of income from low-income households than from high-income households. This is because low-income households spend a larger share of their income on taxable items than high-income households.
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Gross Receipt Taxes Explained
A gross receipts tax is a tax on the total receipts of a business. This tax is typically imposed at the state level. The tax is imposed on the total receipts of the business, regardless of whether the business is profitable.
Gross receipts taxes are typically imposed at a flat rate. However, some states have tiered tax rates, with businesses that have higher gross receipts paying a higher tax rate. The tax brackets and rates vary by state.
Gross receipts taxes are typically imposed on all businesses, regardless of size or industry. However, some states exempt certain types of businesses, such as grocery stores or manufacturing businesses, from the tax.
Gross receipts taxes are typically imposed on the sale of goods and services. However, some states exempt certain types of transactions, such as the sale of inventory, from the tax.
Gross receipts taxes are generally due quarterly or annually. However, some states allow businesses to make monthly or semi-annual payments.
The United States does not have a national gross receipts tax. However, many states impose gross receipts taxes, and the tax rates and rules vary by state.
In 2018, the states with the highest gross receipts tax rates were Nevada (4.6%), Ohio (4%), and Texas (1%). The states with the lowest gross receipts tax rates were Alaska (0%), Delaware (0%), and Montana (0%).
The total amount of gross receipts taxes collected by the states in 2018 was $47.6 billion. The state of Texas collected the most gross receipts taxes, at $8.8 billion, followed by California, at $6.7 billion.
Excise Taxes Explained
Excise taxes are taxes paid when purchasing certain types of goods. The tax is usually calculated as a percentage of the sales price of the good. Excise taxes are often included in the price of the good, so the consumer is not aware of the tax.
Excise taxes are collected by the federal government and by most state governments. The tax is usually collected by the manufacturer of the good. The tax revenue is then distributed to the state and federal governments.
There are many different types of excise taxes, and the tax rate varies by state. The most common excise taxes are on tobacco, alcohol, and gasoline.
Excise tax is just one of the many different types of taxes that can vary significantly by state. The tax rate on tobacco products is higher in some states than others. For example, the excise tax on a pack of cigarettes is $1.50 in New York, but only $0.60 in Virginia. The excise tax on alcohol and gasoline also widely varies by state.
There are many other types of excise taxes, including taxes on firearms, ammunition, and gambling.
Types Of Wealth Taxes Explained
Property Taxes Explained
Property taxes are a tax on real estate. The tax is generally imposed by the government on the value of the property. The tax is usually collected by the municipality in which the property is located. The tax is used to fund public services such as schools, roads, and police and fire departments.
The amount of tax that a property owner must pay is based on the value of the property. The tax rate is set by the government and is usually a percentage of the property value. The tax rate may vary by state, county, or city.
Property taxes are usually paid in two installments, with the first installment due in the spring and the second installment due in the fall. Some property owners may also be required to pay property taxes in one lump sum.
The amount of property tax that a property owner must pay may vary depending on the value of the property and the tax rate. The property tax may also be affected by exemptions and deductions.
Exemptions are subtracted from the value of the property, and deductions are subtracted from the tax owed. Common exemptions include the homestead exemption, the senior citizen exemption, and the disability exemption.
Deductions may include the mortgage interest deduction, the property tax deduction, and the charitable deduction.
The homestead exemption is a deduction that is available to property owners who use the property as their primary residence. The amount of the deduction may vary by state.
The senior citizen exemption is a deduction that is available to property owners who are age 65 or older. The amount of the deduction may vary by state.
The disability exemption is a deduction that is available to property owners who are disabled. The amount of the deduction may vary by state.
The mortgage interest deduction is a deduction that is available to property owners who have a mortgage on the property. The deduction is based on the interest that is paid on the mortgage.
The property tax deduction is a deduction that is available to property owners who pay property taxes. The deduction is based on the amount of property tax that is paid.
