What’s the Big Deal with Taxes?
You have probably heard your parents, friends, and people on the news talking about taxes. Politicians base their campaigns on it and adults complain about filing them, so you know it is an important issue. Taxes have been around for thousands of years, and the majority of countries still use them to keep their economies functioning. Federal Taxes have been around in America since the 16th Amendment to the Constitution in 1913 and are the key component in the government’s revenue used to finance public spending. In short, taxes are mandatory payments that people make to the government. The government collects taxes from the people in a variety of ways. In the chart on the right, you can take a good look at the tax revenue collected by the federal government in 2016 from the Center On Budget and Privacy Priorities. Taxes are collected at the federal, state, and local levels.
There are many types of taxes, but the main three are income, property, and sales tax. The US uses a progressive system for income taxes in which individuals or companies pay a greater percentage of their income based on their tax bracket. Property taxes are an ad valorem (according to value) tax. Property owners annually pay these taxes to the local government where the property is located. Lastly, sales tax is a consumption tax imposed by the government on the sale of goods and services. This can vary in different states and jurisdictions.
WHAT ARE TAXES USED FOR?
Now that we have tackled what taxes are, let's tackle what they are used for. Taxes generally go towards making public goods that private companies don’t make enough of (or don’t make at all). Essentially, taxes help raise funding for government programs and services to provide for the well-being and security of the people who live in the country. Taxes are used for Medicaid, Social Security, national defense, infrastructure, and government programs. At the local level, taxes are used for funding district schools, libraries, roads, police, fire departments, and more!
To file taxes, it is important to know your gross income. To calculate this, you take all your income and subtract payments for retirement contributions, student loan interest, moving expenses, tuition, fees, bad debts, and alimony. After this, you apply deductions to find your taxable income. For single filers, there is a $12,950 deduction and a $25,900 deduction for married people filing together. After this, you can apply for your personal exemptions. Charitable organizations, students with student loans, and veterans are some examples of people eligible for exemptions.
HOW TO FILE TAXES?
Finally, let’s start to understand how to file taxes. First, you must get all of your tax documents together, such as mortgage interest statements, investment income statements, and charitable donation contribution statements. After getting organized, you must choose between standard or itemized deductions. Itemizing deductions include childcare expenses, medical expenses, education costs, and charitable giving, and can drop your taxes further. But you must have proof to itemize deductions. Third, you will determine your filing status, either single, married filing jointly, married filing separately, head of household, or qualifying widow. This helps you determine what to file, your standard deduction, your eligibility for other credits, and ultimately how much you owe in taxes. After spending so much time preparing, you are finally ready to file your taxes. You can do this through a tax professional, tax software, or just by mailing in paper returns. Some good software include Tax-Prep Online Services, Turbo Tax, or Tax Act.
After filing your taxes, you are just one step from finishing. Now, all you have to do is prepare for the future. If one year you have a big tax refund or see a huge increase in taxes, you should consider adjusting your portfolio. But regardless, once your taxes are delivered by the IRS, you must keep all the receipts and important documents organized for at least three years in case there are any problems.