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Explanation of Paying Taxes - Personal Finances: Strategies in Handling Your Money. Also refer to local, city, state, federal, Social Security, sales, property, services, school, police, firemen, parks, water, sewage, percentage, paycheck, W-2, tax report, Ron Kurtus, School for Champions. Copyright © Restrictions
Paying Taxes
by Ron Kurtus (19 May 2007)
Whenever you make money, you are required to pay the government a certain percentage of the amount in taxes. In some areas, you must also pay a sales tax when you buy something. You need to realize your paycheck will be much less than you expected because of the taxes taken out. The money collected from taxes is used to provide government-supported services, to run the government and to pay for their projects. At least once a year, you must file a tax report to verify the money made and taxes paid.
Questions you may have include:
- What are the different types of taxes you have to pay?
- What is the reason for these taxes?
- What is the yearly tax report?
This lesson will answer those questions. There is a mini-quiz near the end of the lesson.
Types of taxes
Before you get your paycheck, Federal, State and sometimes City taxes are taken out. On the average, 30% of your earnings are removed as taxes. On top of that, about 7% of your earnings go to pay for Social Security.
In some European countries, the payroll tax rate is much higher and amounts to over 50% of the money earned.
Sales taxes
Also, in some areas in the United States, there is also a sales tax. You are charged an extra 5% on your purchases. If you buy $500 worth of goods in a month, you have paid an extra $25 in sales tax.
Property tax
Not only that, there is also property tax. If you own a home, you are required to pay a yearly tax, usually on the assessed value of your house. If you are renting, you are really paying a hidden tax that is part of your rent. If the property tax goes up, the landlord will increase your rent a comparable amount.
Plan for taxes
This can be a big disappointment for a young person getting his or her first paycheck. Although people don't like it, after time they get used to having taxes taken out from their checks.
In planning your budget and how much money you will have available to spend, you need to take into account the money that will be taken off for taxes. If your job pays you $600 a week in wages, realize that you will only get about $400 to pay your living expenses, bills, entertainment and savings.
All spending is done knowing what your after-tax paycheck is.
Reason for taxes
Your city, state and country collect taxes to pay for services they provide, as well as operating costs. In some cases, the services may not apply to you, but you are still required to pay for them as being part of the greater community. For example, people that do not have children are still required to pay taxes for teachers and schools. They are really paying to keep their society stable.
Local
Local taxes pay for fire and police protection, schools, local social programs, parks, water and sewage systems, and other services you receive.
State
State taxes pay for colleges, prisons, social programs, parks, state police, government officials and workers, and other statewide services and programs.
Federal
Federal taxes pay for all the major government agencies, including the armed forces. The federal government also collects Social Security, which goes into a fund upon which you can get payments after you are 65-years old.
Filing tax report
In the United States, everyone must file a tax report at least once a year, verifying how much money they made and how much in taxes they paid. Employers send their workers a statement (called a W-2 form in the U.S.) that lists wages and taxes paid. That form must be sent in with the tax papers, along with reports of other income and taxes paid.
In some cases, people have paid more taxes than they owe. People with low income, deductible expenses, or other factors are given relief and allowed to pay less. In such cases, they will get a refund on their taxes.
On the other hand, some have made money where no taxes were collected or the amount deducted from their paychecks was not enough. These people will be required to pay extra taxes to the government. If the amount is too great, there will be a penalty charge. The government wants to get their money right away and not have to wait until tax time.
Summary
Taxes are used to provide government-supported services, to run the government and to pay for their projects. You are required to pay the city, state and federal government a certain percentage of the amount in taxes. You need to realize your paycheck will be much less than you expected because of the taxes taken out.
Always do your best
Resources
The following resources provide information on this subject:
Websites
Books
Mini-quiz to check your understanding
If you got all three correct, you are on your way to becoming a champion in Personal Finances. If you had problems, you had better look over the material again.
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Paying Taxes