Everyone is subject to taxation. Taxes are, according to the dictionary, “a compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions.”
Whether you’ve been filing your own, don’t know how to yet or get them done by someone else, it’s important that you understand these 5 aspects of the tax system to give you more context as you’re filing.
1. Every person, organization, company, or nonprofit is subject to income tax.
“Subject to income tax” means that people and organizations must report their income and calculate their tax. Some organizations are exempt from tax, but they still have to file a return, and their tax-exempt status could be revoked if the organization fails to meet certain criteria.
2. You are taxed on your income.
Income is any money you earn because you worked for it or because you invested resources and received a return. An investment includes buying stock or buying a property from which you earn rental income. Income includes wages, interest, dividends, profits on your investments, and pensions you receive. Income does not include gifts. You are not taxed on gifts you receive such as inheritances and scholarships.
3. You must pay your taxes throughout the year.
This method of paying taxes is called “pay as you go.” Normally, income taxes are taken out of your paycheck and sent directly to the federal government. At the end of the year, you have paid a certain amount of tax. If you paid more than you owe, the government refunds the amount you owe. This is called a tax refund. If you have not paid enough to cover what you owe, then you have a balance due. This balance must be paid by April 15 of the following year or the government will charge you interest and penalties on the amount outstanding.
4. The U.S. tax system is progressive.
That means that people who make more money have a higher tax rate, and people who make less money have a lower tax rate. Your tax rate will change depending on how much money you made that year.
5. The income tax system is voluntary.
That’s because people are free to arrange their finances to receive tax benefits. Voluntary does not mean that the tax laws do not apply to you. Rather, voluntary means you can choose to pay less taxes by managing your finances in a way that minimizes the amount you owe.