Taxes in the United States are imposed for federal, state, and local governments. Taxes are levied on income, sales, payroll, property, dividends, imports, capital gains, estates, and other various fees. Most Americans spend the majority of their taxes on income taxes, which are imposed on the net income of individuals and corporations. The United States is one of only two countries that also taxes its non-resident citizens worldwide on their income, which is done in the same manner and rates as residents that are in the United States. 

What is the Purpose of Taxation?

Money gained by the government by taxation is used to maintain roads, fund government employee wages, and fund the military and other government institutions/agencies. Taxations for individuals and businesses is one of the only ways a country can increase their financial resources. Taxes are also used to disperse money in programs such as social security, welfare, and unemployment benefits. They can also be used to help pay for poor individuals to get healthcare through medicaid, public transportation, to finance the EPA to clean up pollution, and other positive uses for the money gained through taxation.

What Types of Income are Taxable?

The IRS divides income into two categories, earned and unearned. Generally speaking, earned income is income that has been generated by working for an employer, while unearned income is generated from interest, royalties, or dividends. 

Taxable earned income includes:

• Wages
• Interest
• Tips
• Bonuses
• Sick pay
• Unemployment benefits

Taxable unearned income includes:

• Interest
• Royalties
• Dividends
• Rents
• Gambling winnings
• Profit from sales of assets
• Alimony

To reduce the amount paid by individuals on taxes, they can contribute their earnings to a 401K account, retirement account, or an IRA.

What are Tax Refunds and What Qualifies Me to Receive One?

If you have paid over your tax liability number, the extra money paid will be returned to the individual by the IRS, called a tax refund. For example, if you pay $9,750 in taxes, yet your tax liability only accounted for $8,000 for the year, you would receive a tax refund of $1,750. This is a common situation for individuals that are making lower incomes, or happens to those that just happen to overpay their taxes throughout the year. If you go to file your taxes and notice you have actually paid less than the yearly tax liability, you will actually have to pay the remaining balance of your taxes to the IRS by April 15th of the following tax year. If you do not pay these taxes in time, the government does charge interest and penalties on the outstanding amount of money owed.

Tax Credits and Deductions, What Are They and Do I Qualify?

A tax deduction is a deduction that lowers your taxable income, calculated using the percentage of your marginal tax bracket. A tax credit helps reduce your liability dollar-for-dollar, however, cannot reduce your income tax liability to a number lower than zero. Tax deductions are subtracted from your taxable income, while tax credits are subtracted directly from the amount you owe the IRS. Both deductions and credits will help you pay less income tax, there is not one that is better for the other. Which one will better help individuals depends entirely on their situation. 

How Does the Filing of Taxes Work?

Taxes are usually due on April 15th of every year, but in 2020 and 2021 have been pushed back to May 17th. Taxes must be filed before this date to avoid penalties. 

Steps to Filing a Tax Return

• Gather necessary paperwork
  • W-2 from employer
  • Earning and Interest statements (1099 forms)
  • Receipts for charitable donations
• Select Filing Status
  • This status is based solely on whether or not you are married. 
• Decide the method you will choose to file your taxes. 
  • Many people decide to do their taxes online through services such as TurboTax or EZTaxReturn, but others find tax professionals in their area, or do the taxes by themselves!
• Determine if you are taking the standard deduction or itemizing your return
  • Certain taxpayers cannot use the standard deduction option, such as..
    • A married individual whose spouse filed itemizes deductions
    • An individual who files a tax return for less than 12 months of time because there is a change in their annual accounting period
    • An individual who is a nonresident alien or a dual-status alien
      • Nonresident aliens who are married to a U.S. citizen who would like to be treated as a U. S citizen can select standard deduction
    • An estate, trust fund, or partnership.
• If you complete your taxes and end up owing money, you will have to learn how to make a tax payment. You can choose to pay it in full, or apply for a payment plan.
  • https://www.irs.gov/payments
• If you complete your taxes and do not owe money, you will be given a tax return. The amount of your tax return depends on how much money you overpaid in taxes that year. Tax returns are usually sent out around three weeks following the filing of taxes.