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Learn More About Paying Taxes

Posted in: Financial Education

Learn More About Paying Taxes

Banzai Featured Article

Taxes are mandatory charges to individuals and businesses from the government. The money may be owed to local, state, and national governments—it’s not uncommon to pay taxes to multiple levels of government at once. Different governments charge taxes differently, so the taxes you pay in one city, county, or state are likely different from what someone who lives in another area pays.

A tax return is a series of documents used to report your tax information to state and federal governments every year. These documents include things like your income, expenses, and filing status (single, married, etc.). Once you finish the documents, you’re given your total tax liability. This is the amount you’re responsible for paying to the various appropriate governments for the year. Next, you’ll cross-compare that number with the tax amount you’ve already paid during the year. If you’ve already paid more than that number, you’ll request a refund of the excess amount. If you paid less, you’ll have to make up the difference. You’re required to file a tax return to both the state and federal governments, so it’s possible to get a refund from one and pay to the other, get a refund from both, or have to pay to both.

Governments use taxes to fund services, goods, and public infrastructure. The list of specifics is long, but a few of the biggest things taxes pay for in the U.S. include…

  • Emergency services
  • Medicare & Medicaid National security
  • Roads & bridges
  • Schools
  • Social Security

While the specifics have changed through the years, taxes are far from a new concept. In fact, there are records of tax collections in Ancient Egypt, estimated to be from around 3,000 BC.

A tax return is a way to confirm to the government that you paid your fair share of taxes. If you don’t file a tax return, you’ll be assessed fines and, eventually, may face more serious penalties related to tax evasion. Beyond that, it can also be for your benefit to file a tax return, as you may get money back if you overpaid throughout the year.

You need to keep the records of your tax return in case the IRS or state government questions any of the information you submitted. This could lead to an audit, where the government reviews your tax return to make sure that you filled it out correctly and paid everything you were supposed to. The general recommendation is to keep records of your tax returns for at least 3 years, but the IRS can audit a return up to 6 years later if they find that someone didn’t report all of their income. There is no time limit if the IRS suspects someone has committed tax fraud (intentionally filing a false tax return to avoid paying the correct taxes). With that in mind, it’s best to hold on to records of your tax return as long as possible.

Everyone pays taxes! In most states, you’ll pay a sales tax every time you purchase something from a store or pay someone for their services. This is a percentage added on top of the price of some items or services. So, let’s say you lived somewhere with a 7% sales tax rate. If you bought something for $10, you’d pay an extra $0.70 in taxes. That $0.70 isn’t a huge deal, but sales tax can become something you really need to take into account when you’re buying something more expensive, as 7% of $10,000, for example, is $700.

If you earn income, you’ll also need to pay income tax, which is a percentage of what you earn. If you receive a paycheck, income tax is usually automatically taken out. The amount taken is determined by what you fill out on your W-4 when you start a new job. You’ll include information like your filing status and your dependents to determine your withholding (the amount of money taken from each paycheck and paid toward taxes in your name). If you’re earning income that doesn’t have taxes automatically taken out (tips, commissions, etc.), you’re still responsible to pay income taxes on it. To avoid a large bill at tax time, it’s wise to make payments of estimated taxes throughout the year if taxes aren’t being withheld for you. This page from the IRS goes more into how to do that.

Finally, you’ll owe property taxes (also called real estate taxes) if you own property, such as a house or land. You’ll pay these taxes every year, regardless of if you bought the property within the year or not. How much these taxes are and how they are paid will vary depending on where the property is located and the circumstances surrounding the particular property.

You’ll need to file a tax return if you reach the minimum income requirements. This number changes every year. For tax year 2023, single filers under 65 must file if their income is at least $13,850, and married filing jointly couples under 65 must file if their income is at least $27,700. Go here to learn more about whether you need to file a tax return or not.

Even if you aren’t required to file, you may benefit from filing a tax return, as you may have overpaid during the year and can get some money back as a refund. This is particularly true if you qualify for certain tax credits like the child tax credit or the earned income tax credit.

Tax day is usually April 15 every year. This only changes if the date falls on a weekend or holiday, or if there are extenuating circumstances, such as during the COVID-19 pandemic in 2020.

If the tax deadline is difficult for you to meet, you can apply for a federal extension. It’s important to note that this extension only applies to the return, not to any owed taxes. The money will still need to be paid by the regular deadline to avoid penalties. If you cannot afford the owed taxes at that time, you may be able to get on a payment plan. You can learn more about those options here. Those who file their taxes late without these things are charged penalties that grow over time.

You’ll usually pay sales tax when you pay for your item or service. Income taxes are taken out of many people’s paycheck automatically, so you likely won’t have to worry about those. The specifics on property tax depend on where you live. For example, some states require you to pay property taxes on your vehicle when you register it, others don’t. Check with your local city and county to learn more about property taxes in your area.

If you discover that you owe taxes come tax day, there are many ways to pay your bill. Some options include direct pay from a checking or savings account, credit and debit cards, a check or money order, and cash. Learn more about what methods the IRS accepts here.

When you're ready to file your tax return, there are many options including online and mail options. If your adjusted gross income (AGI) is under $73,000 you can file for free using the IRS free file tool. But, because filing can be confusing or stressful, some people choose to pay a tax preparation company to help them through the process. Check out this page from the IRS to learn more about how to file your taxes.

Paying taxes can feel overwhelming. The best way to make sure you’re successful is to prepare beforehand. If you’re ready to get started, check out this Coach to work through your specific situation and learn what documents you’ll need when it comes time to file.