As a teacher I hear parents say a lot of things. They tell me either “I wish I could take your class,” or “I wish they taught us this in High School.” Well here goes because the concept of taxes is very simple yet most people simply don’t understand it. First and foremost taxes are necessary. They fund many programs at the State and Federal level including Medicare, and Social Security just to name a couple. So lets go over some basic details.
First there is Income Tax which is a tax earned on either earned, or unearned income. So what is the difference? Very easy! Earned income is income you worked for and Unearned income is income you get from other sources such as interest earned on a bank account or investment.
Now lets talk about the two most common and most hated types of income tax. Federal and State Income Tax. Federal Income Tax is a tax charged on most earned income in the United States and varies depending on how much you make. The more you make the more taxes you will pay. You can view the 2015 tax tables here. Remember these tables update every year. Here is what you probably don’t know! Federal Taxes help to fund programs related to the 3 branches of the US Government and include items such as national defense, the federal courts, the ATF, FDA and so much more. Table 1 below is from the IRS Data Book for the year 2014 and shows over 1.5 Trillion Dollars in Individual Income Tax Income.
So the number one question has to be where is the money going? What are these taxes being collected for and below is the snapshot from the WhiteHouse outlining our tax spending as a nation and Healthcare seems to be a major priority while Education continues to fall by the wayside and we wonder why we are ranked so low among the rest of the world in education.
So that explains our Federal Income Tax, what about our State Income Taxes? First, there are currently 9 states in the United States that do not charge a State Income Tax. They are Florida, Texas, Washington, South Dakota, Alaska, Nevada, Washington, New Hampshire*, and Tennessee*. (New Hampshire and Tennessee, state tax charged on dividends and investment income only) Don’t think just because a state doesn’t charge income tax that they aren’t making it up somewhere. Tennessee has one of the highest sales taxes in the country, New Hampshire has high property taxes, and Washington has heavy excise taxes. For those states that do charge a state income tax it is usually determined based on earnings just like federal income tax. There are many arguments over the effectiveness of using a state income tax to reduce costs. Many believe that it is better without one, while others realize that the revenue must come from somewhere somehow. State Income Taxes do pay for education and health care but there are many other important uses for state income tax revenue. For a glimpse into what your specific state is doing with there money you want to search for your states balance sheet and Statement of Cash Flows and learn how to read it. For instance reading the North Carolina Tax Statements help me understand where my spending occurs. Later this week I will be addressing Tax Statements thoroughly for those who have trouble understanding them.
Taxes don’t end here though. Payroll taxes is a tax on earned income This tax deduction supports Social Security and Medicare under FICA (The Federal Insurance Contributions Act).
Social Security is our retirement supplement plan. I call it that because you really don’t get a whole lot of money from Social Security and for most people it barely pays healthcare costs. It is however a Federal program that helps fund retirement. There is no excuse for not having your own investments and savings for retirement. You cannot rely on Social Security to handle your expenses post employment. This program supports retirees, people who are disabled, under 18 and lost a parent to death or disability, as well as spousal support for the death as well if they have children under the age of 18. The tax contribution is 6.2% of your income. The maximums vary annually.
Medicare is a Federal program as well that helps seniors age 65 and over pay for and receive healthcare. The tax liability is a flat 1.45% of earned income and there are no annual limits. Employers are also required to match these contributions. So if you pay $100.00 the employer must as well. If you are self-employed you pay both!
Property tax is a tax charged on property such as land, buildings and motor vehicles and varies by state. Some states don’t charge a property tax on vehicles. I get charged a County and Local Municipality property tax on my vehicles. These taxes are usually paid annually. These taxes go to support schools, roads, public safety, libraries and local government.
Sales tax is a tax on purchased goods and services. Most states charge this tax for online and in store purchases. These taxes are a flat percentage of the total value of the product or service you are purchasing. These taxes also go to local government as well as improvement of infrastructure, law enforcement, and health programs as well.
Final the dreaded Excise Tax – The Hidden Tax. It is a tax that is hidden within the price of gasoline, hotel rooms, alcohol, airline tickets and cigarettes. This does not make the product or service exempt from sales tax as well. It is not uncommon to see a sales tax which is separate. The tax revenue goes to support much of the same as every other tax.
Taxes are an extremely controversial subject but in the end they are a necessary part of our lives if we truly want to continue to enjoy our way of life. They support employment of 20 Million Full and Part Time employees. For more information on how important taxes are download the following file (14stlall) which can also be found at http://www.census.gov/govs/apes/ and Includes combined data for all 50 state governments and all local governments (i.e., counties, municipalities, townships, special districts, and school districts) by government function.
I hope this helps you all understand taxes just a little bit better. There is a boatload of information and the funny thing is the majority of Americans just pay their tax bills and aren’t even worried where the money is going. I am not the smartest man but I doubt it takes the smartest man to realize that this may be part of the problem.
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