What Are Taxes?
Taxes are mandatory financial charges imposed by governments on individuals and businesses, serving as the primary source of revenue for funding essential public services like education, healthcare, and transportation. The Internal Revenue Service (IRS) oversees tax collection and enforcement at the federal level in the United States.
Types of Taxable Income and Taxes
- Wages and salaries
- Self-employment earnings
- Investment income
- Rental income
- Retirement distributions
- Social Security benefits (in some cases)
Common types of taxes include:
- Income Tax: Levied on individuals and businesses based on income or profits
- Sales Tax: A consumption tax on goods and services, varying by state and locality
- Property Tax: Charged on real estate properties based on value
- Corporate Tax: Applied to corporation profits
- Excise Tax: Specific taxes on goods like alcohol, tobacco, and fuel
- Payroll Tax: Tax on employment for funding social security and other programs
Tax Brackets and Progressive Taxation
The U.S. uses a progressive tax system with seven federal tax brackets (2023):
| Tax Rate | Single Filers | Married Filing Jointly |
|---|---|---|
| 10% | $0 - $11,000 | $0 - $22,000 |
| 12% | $11,001 - $44,725 | $22,001 - $89,450 |
| 22% | $44,726 - $95,375 | $89,451 - $190,750 |
| 24% | $95,376 - $182,100 | $190,751 - $364,200 |
| 32% | $182,101 - $231,250 | $364,201 - $462,500 |
| 35% | $231,251 - $578,125 | $462,501 - $693,750 |
| 37% | $578,126+ | $693,751+ |
Deductions and Credits
Standard Deduction vs. Itemized Deductions
The standard deduction for 2023:
- Single filers: $13,850
- Married filing jointly: $27,700
- Head of household: $20,800
Common itemized deductions include:
- Mortgage interest
- State and local taxes (up to $10,000)
- Charitable contributions
- Medical expenses exceeding 7.5% of AGI
Unlike deductions, which reduce taxable income, credits directly reduce your tax bill dollar-for-dollar.
Popular tax credits include:
- Child Tax Credit
- Earned Income Tax Credit
- American Opportunity Credit (education)
- Lifetime Learning Credit
- Clean Vehicle Credit
Filing and Payment
The standard tax filing deadline is April 15th (or the next business day if it falls on a weekend or holiday). You can request a six-month extension using Form 4868.
Important: An extension of time to file is not an extension of time to pay any taxes owed.
Tax Planning Strategies
Retirement Accounts
Contributing to tax-advantaged retirement accounts can reduce taxable income:
- Traditional IRA: Up to $6,500 (2023), plus $1,000 catch-up if 50+
- 401(k): Up to $22,500 (2023), plus $7,500 catch-up if 50+
Health Savings Accounts (HSAs)
For those with high-deductible health plans:
- Individual: $3,850 (2023)
- Family: $7,750 (2023)
- Additional $1,000 catch-up contribution if 55+
Record Keeping
Maintain organized records of:
- Income documents (W-2s, 1099s)
- Receipts for deductible expenses
- Investment statements
- Charitable donation receipts
- Business expenses
Keep records for at least three years from the filing date or two years from when you paid the tax, whichever is later.
For more detailed information, visit the IRS website or consult with a tax professional.