What Are Taxes? - 1

What Are Taxes?


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What are taxes and how do they work?

Taxes are the fees everyone in the world pays to their government in one way or another to pay for the goods and services provided by the government like law enforcement, health care, the military, and others. Taxes are normally collected in a few different ways.

What are the different types of taxes?

There is income tax, where the government takes a portion of your earned income before you get paid. These taxes apply to individuals as well as corporations. Payroll taxes are usually a part of what you are taxed on your income. In the US these include “FICA” taxes, which are the taxes that go towards things like social security, Medicare, unemployment insurance, and more.

Income taxes in the US are also progressive in nature meaning you will be charged a certain percentage in taxes when you are part of the first tax bracket. After you reach the next tax bracket everything you make after that will be charged at an even higher percentage, and this continues every time your income reaches a certain tax bracket.

Just to be clear, only the income you make that is part of a specific tax bracket will be charged at that rate, as opposed to everything you make being taxed at the higher tax bracket once your income reaches it.

what are taxes?

Here are the income tax brackets for 2021

Tax RateSingles Tax BracketMarried filing Jointly Tax BracketHeads of Household Tax Bracket
10%$0-9,950$0-19,900$0 to $14,200
12%$9,951-40,525$19,901-81,050$14,201 to $54,200
22%$40,526-86,375$81,051-172,750$54,201 to $86,350
24%$86,376-164,925$172,751-329,850$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,901 to $209,400
35%$209,426-523,600$418,851 to $628,300$209,401 to $523,600
37%$523,601 and greater$628,301 and more$523,601 or more

There are property taxes, which you pay based on the valuation of the price of any and all big-ticket property items, like cars and houses, and you pay every year. In the case of houses, when they go up in value over time as they typically do, the government constantly reassess the value of your house and charges you a percentage of its total “market value” every year in tax. In the case of cars or other vehicles, they typically “depreciate” or lower in value over time. When this happens you can actually deduct this depreciation from your taxes every year if you use your car for business.

There are sales taxes, which you pay on every purchase that you make. Whenever you purchase goods or services your local, state, or federal government charges a certain percentage of the product’s price that then gets added to the final sale. In some countries, this is called a VAT or value-added tax.

One type of tax that I’ve talked about on this blog is those dealing with capital gains. These taxes are ones that you pay on the earnings of your investment in regular taxable investment accounts. These tax rates are actually lower than your average income tax rates.

Here are the tax brackets for capital gains taxes in 2021

Tax RateSingles Tax BracketMarried filing jointly Tax BracketHead of Household Tax Bracket
20%$441,551 and greater$496,601 and greater$469,051 and greater

These are some of the most common types that people pay throughout their lives. Taxes used to need to be done mainly by CPAs, CFAs, and etc. Nowadays we have specialized software like TurboTax, H&R Block, and others that almost entirely automate the process for regular people nowadays. You might still need the help of a CPA if you do something like own investment, run a business, do freelancing, or stuff like that since it makes your tax situation slightly more complicated than just with a regular W-2 income.

Disclaimer: I am not any sort of investment or financial professional giving any sort of legal advice. I’m just some guy trying to teach other people about how they might navigate the financial world.

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