Filing of taxes is an intimidating task for any individual, whether you are doing it for the first time or have done it many times before. For first-timers, the experience is just downright scary as the average person is unlikely to be able to understand some of the technical terminology related to taxation.
As complicated as the world of taxation may seem, it is vital for every individual to have a basic understanding of it. No matter what your occupation or age, you will have to deal with taxes at some point in your life. For this reason, we have compiled a basic guide for the common men to understand taxation.
WHO DECIDES THE TAXATION LAWS?
Congress determines the tax laws and rules on the federal level. It is responsible for coming up with the Internal Revenue Code (IRC) or Tax Code, which is a document detailing the rules and regulations to be followed by individuals and businesses in paying a percentage of their income to the government in the form of taxes. This document directs the tax collection and enforcement of tax rules and defines the rules concerning tax rebates, refunds, and credits.
The Internal Revenue Services (IRS), which is a government agency operating under the U.S Treasury, ensures implementation of this Tax Code by guiding how the tax rules are to be applied. It also collects tax, processes tax returns and deposits the money it collects from taxes with the U.S Treasury.
WHY DO GOVERNMENTS COLLECT TAXES?
The government collects taxes from individuals and businesses in order to gather funds for different government agencies that work in the interests of the general public. The government has to build roads, dams, hospitals, schools as well as pay the salaries and pensions of government employees. Collecting taxes is the only way to raise funds for these social needs.
For anyone who wishes to gain a full understanding of how taxation works and detailed knowledge of taxation laws, an online course of LLM taxation is a great option. It gives you the expertise required to work as a senior-level tax lawyer in both public and private sector organizations. You can also use a tax calculator to estimate and predict your future taxes.
WHAT ARE THE DIFFERENT TYPES OF TAXES?
The following are some of the main types of taxes:
- Income tax: This is a tax imposed on the financial income generated by individuals. In most cases, income tax is progressive, meaning the higher the income, the greater the rate of tax.
- Corporate tax: This is the tax collected on the profits earned by businesses.
- Sales tax: This tax is imposed on the sale of goods or services, often in the form of GST or VAT. It is charged as a percentage of the selling price of an item. Rates vary according to the category of items; for instance, clothing may be taxed at one rate while restaurant food or basic necessities are likely to be taxed at another.
- Property tax: Also referred to as an Ad Valorem tax, this tax is payable by the owner of the property, based on the value of the property. Property taxes are generally paid on a recurring basis; they may either be paid as a monthly fee included in their mortgage payments or once a year.
- Capital gains tax: This tax is imposed on the capital gain or profit made by both businesses and individuals on the sale of assets such as real estate, stocks, and bonds.
- Inheritance tax: This tax is paid by individuals who inherit valuable possessions from a deceased person based on the value of assets inherited.
WHO HAS TO PAY TAXES?
Every individual and business has to pay tax. Both individuals and businesses must report their income by filing their tax returns. Certain organizations, like not-for-profit organizations, are exempt from paying taxes, but they must still file their returns.
The level of income tax payable by an individual depends on his income, but you can reduce the tax payable through the use of different kinds of tax benefits, deductions, and allowances.
HOW IS INCOME TAX COLLECTED?
Most of the government’s tax revenue comes from income taxes, and thus, the IRS wishes to collect taxes throughout the year. For an employed individual, the income tax is withheld from the person’s paycheck every month, and the employer deposits this money with the government on the individual’s behalf. This system ensures that every individual is paying their taxes on an ongoing basis.
At the end of the year, each individual has to file an income tax return to calculate whether they have paid the right amount of tax through withholding or whether they need a tax refund for paying excessive tax.
The income tax collection for self-employed individuals is different. Since there’s no tax withheld on their salaries, they have to pay taxes on their expected income on a quarterly basis. They must forecast the amount of income they can expect to earn and pay taxes based on it.
Taxation is a complicated area, and it is not possible for the common men to understand the technicalities of it. However, by understanding the basics, you can make the management of your financial affairs a whole lot easier for yourself.