Tax laws can be complex and confusing. Knowing the basics of the United States tax system can help individuals and business owners budget, plan and save money in the long run. This guide covers taxes individuals and businesses must pay, deductions and credits available, resources to use, and penalties for not properly filing your taxes.
Types of Taxes
Some of the most common types of taxes that individuals and businesses must pay in the United States include:
1.Federal income tax: The US federal government requires a progressive income tax on income earned by individuals, corporations, and other entities.
2.State income tax: Most US states also collect an income tax from individuals, businesses, and other entities. The tax structure and rates vary from state to state.
3.Property taxes: Property taxes are collected by local governments to help fund schools, infrastructure, police, and other public services. The amount of property tax you pay depend on your local tax rate and the value of your property.
4.Sales tax: This includes all state, county, and local taxes paid on the sale of goods and services. The amount of sales tax you pay can vary depending on where you live.
5.FICA: The payroll tax imposed by the Federal Insurance Contributions Act (FICA) is reason why you pay Social Security and Medicare taxes. Employers are required to withhold a certain percentage of employee wages for FICA taxes each pay period.
Deductions, Credits and Other Benefits
In addition to the taxes listed above, there are several deductions and credits that can help individuals and businesses reduce their tax liability.
1.Tax deductions: These are expenses that you can deduct from your taxable income. Generally, tax deductions reduce your taxable income, which in turn reduces your tax liability. Common deductions include medical expenses, student loan interest, qualified charitable contributions, and state and local taxes.
2.Tax credits: Unlike deductions, which reduce your taxable income, tax credits reduce the amount of taxes you owe on a dollar-for-dollar basis. The earned income tax credit and the child tax credit are two popular tax credits available to individuals.
3.Incentives: Federal, state, and local governments offer various incentives that can help businesses lower their tax bill. These incentives can vary greatly depending on the type of business, its size, and its location.
Resources to Utilize
In this day and age, there are many resources available, both online and offline, to help individuals and business owners better understand the US tax system.
1.IRS.gov: This is the official website of the Internal Revenue Service, and it is the best place to find everything you need to know about US taxes. There are also numerous publications and resources available from the IRS to help you understand the tax system.
2.TaxPrep Software: Tax preparation software is a great way to quickly and easily prepare and file your federal and state taxes. Examples of popular tax prep software include Turbo Tax, TaxAct and H&R Block.
3.Tax Lawyers and Accountants: Professional tax lawyers and accountants can help those with more complicated tax situations. Tax law is complicated and ever changing, so hiring an expert can often save you time, money and frustration in the long run.
Penalties for Not Paying Your Taxes
The IRS is serious about collecting taxes, and failure to pay what you owe can result in costly penalties and interest. There are a variety of penalties that can be imposed for not filing or paying taxes, such as:
1.Failure to file penalty: This penalty is imposed when you fail to file your taxes by the tax return due date (usually April 15).
2.Failure to pay penalty: This penalty is imposed when you fail to pay your taxes by the tax return due date.
3.Underpayment of estimated taxes penalty: If you’re an individual or business owner who has to make estimated taxes throughout the year, you may be subject to a penalty if the total amount wasn’t enough.
In addition to the penalties, the IRS may also levy interest onto unpaid taxes. The rate of interest is determined by federal interest rates and can accumulate quickly.
Knowing the basics of the US tax system can help individuals and business owners budget, plan and save money in the long run. Tax laws can be complex and confusing, but there are many resources available, both online and offline, to help you better understand the system. It is important to note that not filing or paying taxes can result in significant penalties and interest. If you are unsure about the tax laws or need more assistance, a professional tax lawyer or accountant can help answer questions and guide you through the process.