A tax is a compulsory contribution to state revenue imposed by the government on income and business profits or added to the cost of some goods, services, and transactions.
Almost everything you buy, own, rent, sell, or earn is taxed. As long as you are living, you pay taxes. Different types of taxes include income tax, capital gains tax, property tax, sales tax, corporate tax, payroll tax, and inheritance tax (also known as the “death tax”).
The two most common forms of taxation are income tax and sales tax.
Every person working in the U.S. is required to pay income tax at both the federal and state levels. Income tax is deducted from your salary every month. The amount of tax varies with income, age, dependency status, and other factors. Income tax rates in the U.S. vary from 10% to 39.6%, depending on your yearly income.
If more income tax is taken out of your salary than is required, you are eligible for a tax refund. If not enough tax was taken out of your salary, you need to pay the remaining tax by April 15 of the following year, also known as “Tax Day.”
Any earned money, even from temporary jobs, such as lawn mowing, baby-sitting, or working at the local cafe, is considered “earned income.” Anyone with a total income of more than $5,700 per year is required to pay taxes.
Sales tax is part of the price you pay for goods and services. Everything from groceries to fuel can carry a sales tax, which varies from state to state. For example, in Pennsylvania, residents do not have to pay a sales tax on groceries and clothing. California has the highest sales tax rate at 7.5%, and Colorado has the lowest at 2.9%.
To view sales tax rates by state, click here.
The U.S. taxation system
The U.S. taxation system is quite complex. While the Bible has about 700,000 words, the U.S. Federal Tax Code has more than 7,000,000. It’s important to know, however, that while taxes are levied by both the federal and state governments, each state has its own taxation laws, and different tax rules apply to individuals and businesses.
Deciphering taxation laws can be perplexing. Albert Einstein said, “The hardest thing in the world to understand is the income tax.”
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Why do we have to pay taxes?
Taxes are necessary for the government to fund its public expenditures, which include the public infrastructure, social welfare programs, and security agencies, such as the police and the military.
How can I pay less in taxes?
While there is little you can do to avoid taxes altogether, you can legally reduce the amount of tax you have to pay through adequate tax planning.
One of the best ways to reduce your income and consequently your taxes is by opening an Individual Retirement Account (IRA). The advantage of an IRA is that you can withdraw the amount you need to pay for college or your first house without a penalty.
You can also lower your taxes by increasing your income tax deductions (e.g., expenses incurred toward healthcare, mortgage interest, and charitable donations).
To view the U.S. income tax rates by state, click here.
You can see how yours compare to tax rates from around the world.
Want to explore a brief history of income taxes in the U.S.? If so, click here.
To assess your tax liability, use the U.S. Income Tax Calculator.
- Billionaire Warren Buffett claims he is paying a lower tax rate than his secretary. Buffett has been advocating for a minimum tax on top wage earners like himself who benefit from tax breaks.
- In Texas, cowboy boots are exempt from sales tax. Hiking books are not.
- The largest tax evasion case in the history of the U.S. is the 2006 case of Walter Anderson, a telecommunications executive, for failing to pay more than $200 million in personal income taxes by stashing income in offshore bank accounts.
- Other famous tax cheats include mobster Al Capone, Wesley Snipes, and hotel operator Leona Helmsley, who once quipped, “We don’t pay taxes. Only the little people pay taxes.”