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How Taxes Work

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The road your bus took to school. The school itself, your teachers, the lights in the building, the playground, the sports equipment, and your report card are all paid for with taxes. You might have known that already. But what are taxes? Why are taxes collected? Who collects them? Those are just some of the questions about taxes you might have. Hopefully, we answer all of them!

What are taxes?student planning

Simply put, taxes are money the government charges and then uses to pay for things we all need and use. Cities, states, and the federal government all levy, that means charge, taxes on different things, from income to packs of gum. It’s a percentage of some other amount.

Types of taxes:

  • Income Tax – Taxes paid based on how much money you make.
  • Sales Tax – Taxes based on how much an item costs.
  • Excise Tax – Taxes over and above sales tax, often on an item seen as indulgent or polluting.
  • Payroll Tax – This includes Social Security tax and other taxes you and your employer pay.
  • Property Tax – Tax on the property you own, your house, and the land it is on.
  • Estate Tax – A tax on your right to transfer property at your death. But it only applies to people with over $5.34 million in assets when they die. It’s a little weird.
  • Gift Tax – If someone gives you more than $14,999.99 you have to pay taxes on it, kind of like income tax.

Why are taxes collected?

It takes money to run the government. There are some things we all need and use:roads, schools, libraries, firefighters, and parks. Sure, you could figure out a way to pay for these each time you use them, but that would be hard to figure out and unfair to some people.

Trying to pay the fire department before they save your house from a fire would be insane. Yes, some parks do charge to get in, however, that price is kept down by taxes. Essentially, taxes pay for the bare minimum that society needs.

Who collects taxes?

On the federal level, that’s for the whole country, the Internal Revenue Service is responsible for collecting taxes. The IRS was formed in 1862 and its current name was established in 1918.

At the state level, there are different names for the different treasury departments. Listing them all here would just be a waste of space and you wouldn’t learn much.

Counties and cities have assessors who value your property and determine how much tax is owed.

How are taxes paid?

Some taxes are collected when you buy things—sales and excise tax. Others you will be sent a bill, like property tax.

When it comes to income tax, it depends. But essentially you fill out paperwork saying how much you made, but also any deductions you might qualify for. Then you pay what you owe. Federal income tax is often withheld from your paycheck.

Common deductions:

  • Student loan interest
  • Child tax credits
  • Charitable donations
  • Mortgage interest

There are a lot more, but you get the point.

If you have any more questions about taxes and your parents don’t have the answers, try reaching out to someone at your credit union. They’ll be happy to help you find someone that can answer your questions!

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