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What is Tax?

May 16, 2023

If you're unsure what tax is then you've come to the right place to learn what is tax and how does it apply to me?

You might be new to paying taxes and wondering what taxes really mean for you, or you could be looking for a fresher course in all the tax basics. Either way, you've found the right place. Taxes can seem like an infinitely complex topic, especially to anyone who's recently started filing their own tax returns.

What is Tax?

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Taxes are a financial obligation that members of a society have toward the government. Taxes can be put on things like income, profit, and expenses. Governments use taxes to gain financial contributions from civilians and businesses. Those funds are then used for government spending like building roads, creating welfare programs, and more. When broken down as simply as possible there are basically 2 types of tax, direct tax and indirect tax. 

Direct Tax

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Direct taxes mostly impact individual people. They are taxes imposed directly onto individuals and are usually measured by their ability to repay. This is where tax brackets come in to categorize people into what kind of tax percentage they can afford. 

Indirect Tax

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Indirect taxes can indirectly impact individuals. They are taxes imposed on other parties like corporations and the goods and services they provide. This can then impact individual consumers indirectly with the prices of goods and services and things like sales tax. 

What Does Tax Mean for Me?

The existence of taxes means that you as a taxpayer will mostly likely have tax obligations to fulfil each year. You might be already paying your taxes through your paychecks and when a business charges you a tax on something you buy.

Governments usually set up a separate organization to collect and deal with taxes. In the US, the name of this organization is the Internal Revenue Service (IRS). When taxpayers file tax returns each year, they submit them to the IRS. Then, if you get a tax refund or a tax credit of some kind, that is paid and sent to you through the IRS. 

Check City Offers Both Federal and State Tax Services

Who Pays Taxes? 

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Almost everyone pays taxes, including businesses. There are usually taxes placed on all residents of a country or state, including individual residents and corporate residence. This means that companies, or corporate entities, are also considered a kind of resident wherever their company headquarters resides. So businesses also need to pay taxes federally and in wherever their headquarters' state may be.  

Why Do We Pay Taxes?

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The money that the government collects from taxes is used for various purposes. In general, they are used for government spending, but this can include many different things. The overall idea behind why taxes exist is to help a governing entity have the funds necessary to take care of that government's people, infrastructure, and economy. 

What are Taxes Used for?

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Tax money may be used for public services and other government operations and programs like Social Security Programs and Medicare. It also goes toward public infrastructure like public schools, emergency services, and roads. 

Types of Taxes

There are several types of taxes you may need to be aware of. You don't want to forget any type of tax and risk getting audited by the IRS for missing any of your tax obligations. Take note of the following examples of taxes that apply to you and your situation. 

Federal Tax

Taxes can be imposed at different government levels. Federal taxes refer to all taxes imposed at the federal level. 

State Tax 

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Taxes can be imposed at different government levels. State taxes refer to all taxes imposed at the state level. 

Corporate Tax

Corporations also have to pay taxes. Businesses need to pay a percentage of the profits they earned that year. This money then goes toward funding federal government programs.

Sales Tax

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Sales tax is paid by taxpayers when they buy certain goods and services. What goods and services have a sales tax depends on the state you are in. 

Property Tax

Property taxes are paid by homeowners and other owners of real estate properties. The percentage of property tax you'll need to pay depends on the value of the land the property is on and the value of the property itself.  


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Tariffs are taxes on imported goods that are paid by corporations in the business of importing goods from abroad. 

Estate Tax

An estate tax is placed on an estate after the owner of the property has died. 

Income Tax

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Income tax is paid by the taxpayer. It is a percentage of money taken from someone's income. Income before taxes also referred to as gross income. There is income tax placed on all forms of gross income, so if you have more than one job, you will need to pay income tax on both those sets of income. 

Payroll Tax

Payroll tax is paid by the taxpayer through their employer. Someone's employer takes this tax from their employee's paychecks to pay the IRS on their behalf. This tax goes toward funding programs like Medicare and Social Security.

In Conclusion,

Knowing where you fall in the 7 different tax brackets can help you better understand your personal tax status and situation. Knowing what the differences that your tax filing status can make is also a really important thing to understand before you file this year.