Taxes are mandatory contributions you are required to make to local, state and federal governments. Taxes in the U.S. come in a wide variety of forms including income taxes, property taxes, sales taxes and many others.
What Are Taxes and Why Are They Important?
In 2019, Americans paid $1.6 trillion in income taxes off a gross adjusted income of $11.9 trillion, according to the Tax Foundation. Taxes are not only important because of how much of your income they take, but also because of what you get in return.
Governments rely on taxes as their main revenue source. This money funds public programs, work and services. Taxes provide the money necessary to maintain your local and national infrastructure, such as emergency and welfare programs.
Different levels of government – federal, state and local – pay for different public services, but sometimes they may overlap. For example, all three levels of government pay for different costs associated with roads, education and some other services.
How Are Federal Taxes Used?
Most of the taxes collected by the federal government go to national defense, Social Security, Medicare and other health or social programs.
The federal government routinely spends more money than it collects from taxes and other forms of revenue. As of Jan. 2023, the national debt – the amount of money the federal government owes – was more than $31.4 trillion, according to the Peter G. Peterson Foundation.
How Are State and Local Taxes Used?
State spending varies depending on a lot of different factors, from population to overall wealth to the amount of taxes they collect. But education is the single biggest expense for every state in the union.
State and local taxes often go to the same service – public schools are a good example. The state may fund part of the costs and local counties, cities or school districts spend local taxes on them as well.
Combined spending on elementary, secondary and higher education accounts, on average, for nearly a third of state and local expenditures, according to the nonprofit Urban Institute.
Public welfare costs include most Medicaid costs while police spending also includes money spent on courts and correctional facilities in the Urban Institute analysis.
State and local governments spent roughly $4.44 trillion in 2020, according to U.S. Government Spending.
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What Are the Most Common Types of Taxes?
Taxes come from a variety of sources. The nature of what is taxed and the method required to collect the tax often determines the different types of taxes. Understanding taxes can help you better manage your personal finances.
Taxation on annuities is a bit different; here, taxes aren’t due until you start to receive income payments from your annuity.
Common Types of Taxes
- Income taxes
- These are taxes you pay on your earned income – salaries, wages, tips and commissions – and unearned or investment income such as interest and dividends. The federal government, 43 states and several local governments collect some type of income taxes.
- Payroll taxes
- Payroll taxes include Social Security and Medicare taxes. These are taken out of your paycheck to pay for these specific programs.
- Capital gains taxes
- Capital gains taxes are a tax on the profit you make when you sell an investment such as stocks, bonds or real estate.
- Corporate taxes
- Taxes states and the federal government place on a corporation’s profits. Companies pay taxes based on corporate income minus the cost of making the goods and services sold, administrative costs and other operating expenses.
- Estate taxes
- Estate taxes are the taxes you have to pay to transfer property upon your death. They are based on the fair market value of everything you own or have an interest in at the time of your death.
- Property taxes
- Property taxes typically apply to the value of your real estate. But they may also apply to business inventories or big-ticket items such as cars, boats or other vehicles that you own.
- Sales taxes
- Sales taxes are a tax on retail products you purchase based on a set percentage of the cost of the item you purchased. These are typically used by state and local governments.
- Tariffs
- Tariffs are a tax placed on products imported from other countries. The tariff is paid by the consumer buying the product, not the foreign country or importer from which it came.
Federal Tax Brackets
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How to File Your Taxes
For most Americans, the term “filing your taxes” applies to your federal and state income tax returns. It means providing information about your income and other information to make sure that you pay the amount of taxes you owe on your income.
You can file paper returns or file your income taxes online. You can file your taxes yourself, you can pay a tax preparer to do the work for you or you can use a digital filing service.
6 Steps to File Your Federal Income Tax Return
- Gather your paperwork
- Make sure you have your W-2 form from each employer you had in the previous year, other earning and interest statements (Forms 1099 and 1099-INT) and receipts for all charitable donations, medical expenses and business expenses if you are itemizing deductions on your return.
- Choose your filing status
- Your filing status is based on whether you are married and can be affected by the amount you pay toward household expenses.
- Decide how to file
- The Internal Revenue Service (IRS) recommends that you use tax preparation software and e-filing digitally. This tends to be the quickest, easiest and most accurate way to file your tax returns. But you can choose to file a paper return if you want.
- Decide if you are itemizing or taking a standard deduction
- Deductions reduce the amount of income taxes you have to pay. The standard deduction varies depending on your age, filing status and several other factors. It changes each year. Itemized deductions are a better route if they add up to more than your standard deduction. You may also not be eligible for a standard deduction in some circumstances.
- Pay taxes if you owe any
- If you overpaid your taxes through withholding or other payments in the previous year, you’ll get a refund. But if you owe taxes, the IRS has several methods for paying your taxes – including mailing a check, using a debit or credit card and paying by a direct bank transfer.
- Pay your taxes before the deadline
- It’s important to remember that you have to file your taxes and pay any amount due before the annual deadline to avoid interest and penalties. For federal income taxes, this is typically April 15 of each year. But it may vary depending on whether the fifteenth falls on a weekend or certain state holidays. It was extended by three months in 2020 during the COVID-19 pandemic.
Typically, income tax filing software will let you do your state income tax returns as well – without having to reenter all the information from your federal income tax return.
Deadlines for filing your state income tax return vary from state to state. You should check with your state to determine when your state forms are due.
How Do You Pay Other Taxes?
Other taxes are collected in other ways and can vary from state to state and from tax to tax.
For example, local governments may send you an annual bill for property taxes. Or you may have to pay property taxes whenever you renew your driver’s license or car tags.
Sales taxes are collected whenever you buy something – simply added onto the price rung up at the cash register. Tariffs are added to the price of an item before you buy it.
What Are Tax Deductions?
Tax deductions are a personal or business expense that reduces how much of your income is subject to tax. These typically fall into two categories – standard and itemized deductions.
The federal income tax standard deduction reduces your taxable income based on your filing status, age, whether or not you are blind and how many dependents you have.
Itemized deductions are different expenses you’ve had that the law lets you claim to reduce your taxable income.
Typical Itemized Deductions
- State and local income or sales taxes
- Real estate taxes
- Personal property taxes
- Mortgage interest
- Losses due to a federally declared disaster
- Charitable contributions
- Part of your medical expenses
- Part of your dental expenses
Tax filing software typically walks you through potential deductions. Tax preparers can also help you find deductions. If you are preparing your own tax return, you should use IRS Schedule A (Form 1040), Itemized Deductions when filing your taxes.
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Last Modified: February 27, 2023
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Written By
Terry TurnerSenior Financial Writer and Financial Wellness Facilitator [emailprotected]
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Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Peter G. Peterson Foundation. (2023). What Is the National Debt Today? Retrieved from https://www.pgpf.org/national-debt-clock
- Tax Foundation. (2022, January 20). Summary of the Latest Federal Income Tax Data, 2022 Update. Retrieved from https://taxfoundation.org/publications/latest-federal-income-tax-data/
- Internal Revenue Service. (2021, October 19). Current Tax Tips. Retrieved from https://www.irs.gov/newsroom/irs-tax-tips
- Internal Revenue Service. (2021, October 5). Paying Your Taxes. Retrieved from https://www.irs.gov/payments
- Internal Revenue Service. (2021, August 24). Topic No. 501 Should I Itemize? Retrieved from https://www.irs.gov/taxtopics/tc501
- Internal Revenue Service. (2021, June 26). Classification of Taxpayers for U.S. Tax Purposes. Retrieved from https://www.irs.gov/individuals/international-taxpayers/classification-of-taxpayers-for-us-tax-purposes
- LaPonsie, M. (2021, April 8). Understanding Federal vs. State vs. Local Taxes. Retrieved from https://money.usnews.com/money/personal-finance/articles/understanding-federal-vs-state-vs-local-taxes
- Willets, J. (2021, February 18). Federal vs. State Tax: Why Do We Pay Taxes? Retrieved from https://www.jacksonhewitt.com/tax-help/jh-tax-talk/difference-federal-state-taxes/
- USAFacts. (2020, September 12). How Much Does the Average American Family Pay in Taxes? Retrieved from https://usafacts.org/articles/average-taxes-paid-income-payroll-government-transfers-2018/
- Herron, J. (2019, April 15). You Just Cut a Check to the IRS. So What Do Your Taxes Pay For? Retrieved from https://www.usatoday.com/story/money/2019/04/15/what-do-taxes-pay-for-defense-social-security-medicare-and-more/3450446002/
- U.S. Treasury Department. (2010, December 5). Economics of Taxation. Retrieved from https://www.treasury.gov/resource-center/faqs/Taxes/Pages/economics.aspx
- Internal Revenue Service. (n.d.). Home Page. Retrieved from https://www.irs.gov/
- Internal Revenue Service. (n.d.). Understanding Taxes. Retrieved from https://apps.irs.gov/app/understandingTaxes/student/glossary.jsp
- Urban Institute. (n.d.). State and Local Expenditures. Retrieved from https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/state-and-local-expenditures
- USA.gov. (n.d.). Taxes. Retrieved from https://www.usa.gov/taxes
FAQs
What are taxes and what are they used for? ›
Taxes are mandatory payments made by people and businesses that help fund government services at the federal, state and local level. Tax revenue pays for things like Social Security and Medicare, education, national defense, infrastructure and other goods and services intended to benefit the community.
What are taxes Short answer? ›What Are Taxes? Taxes are mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national. Tax revenues finance government activities, including public works and services such as roads and schools, or programs such as Social Security and Medicare.
What is tax information? ›Tax Information means information and/or properly completed and signed tax certifications sufficient to eliminate the imposition of or to determine the amount of any withholding of tax, including FATCA Withholding, imposed on payments to the provider, and to allow the recipient to comply with any reporting or other ...
Why do we use tax? ›Taxes are used by the government for carrying out various welfare schemes including employment programmes. There are Lakhs of employees in various departments and the administrative cost has to be borne by the Government.
What are taxes used for quizlet? ›What do our taxes pay for? Taxes pay for those services like Medicare, Medicaid, the military, the national debt, police and fire protection, public schools, road maintenance, parks, libraries, and safety inspections of food, drugs and other products.
What are taxes examples? ›Learn about 12 specific taxes, four within each main category—earn: individual income taxes, corporate income taxes, payroll taxes, and capital gains taxes; buy: sales taxes, gross receipts taxes, value-added taxes, and excise taxes; and own: property taxes, tangible personal property taxes, estate and inheritance ...
What are the three main types of taxes? ›- Sales taxes are paid by the consumer when buying most goods and services. ...
- Income taxes are paid on many sources of income you might earn, like the taxes taken directly from your paycheck.
progressive tax—A tax that takes a larger percentage of income from high-income groups than from low-income groups. proportional tax—A tax that takes the same percentage of income from all income groups. regressive tax—A tax that takes a larger percentage of income from low-income groups than from high-income groups.
What tax information is needed for taxes? ›- Income from jobs: forms W-2 for you and your spouse.
- Investment income—various forms 1099 (-INT, -DIV, -B, etc.), ...
- Income from state and local income tax refunds and/or unemployment: forms 1099-G.
- Taxable alimony received (applicable to divorces finalized before January 1, 2019)
In addition to proof of your identity, and the identities of your family members, documents you should bring to a tax preparer include: Social Security documents. Income statements such as W-2s and MISC-1099s. Tax forms that report other types of income, such as Schedule K-1 for trusts, partnership and S corporations.
Where is my tax information? ›
Whether you owe taxes or you're expecting a refund, you can find out your tax return's status by: Using the IRS Where's My Refund tool. Viewing your IRS account information. Calling the IRS at 1-800-829-1040 (Wait times to speak to a representative may be long.)
How does taxes work? ›The IRS has tax brackets tied to income. The more you make, the higher your tax bracket and the greater the percentage of your income that's taxed. Folks with very low incomes or no income don't pay federal income taxes at all. You don't take your tax bracket and apply that percentage to your entire income, though.
Where is tax money used? ›Here are a few other ways the government uses your tax money: Unemployment and labor programs like Temporary Assistance for Needy Families (TANF) as well as retirement and disability benefits for federal employees. Government expenses like U.S. Customs and Border Protection and the operation of the Federal Prison ...
What is the full meaning of tax? ›noun. a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. a burdensome charge, obligation, duty, or demand. verb (used with object) (of a government)
What are the two forms of tax? ›Direct and indirect taxes
It is usually said that a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.
Here are the 97 taxes in the US tax code: Air Transportation Taxes. Biodiesel Fuel Taxes. Building Permit Taxes.
How many types of taxes are there and what are they? ›When it comes to taxes, there are two types of taxes in India - Direct and Indirect tax. The direct tax includes income tax, gift tax, capital gain tax, etc while indirect tax includes value-added tax, service tax, goods and services tax, customs duty, etc.
Can you do your taxes without your tax info? ›If you cannot get a copy of your W-2 or 1099, you can still file taxes by filling out Form 4852, “Substitute for Form W-2, Wage and Tax Statement.” This form requests information about your wages and taxes that were withheld.
How do I do taxes? ›There are three main ways to file taxes: fill out IRS Form 1040 or Form 1040-SR by hand and mail it (not recommended), file taxes online using tax software, or hire a human tax preparer to do the work of tax filing.
Can I access my tax information online? ›Access your individual account information including balance, payments, tax records and more. If you don't have an existing IRS username or ID.me account, have your photo identification ready. More information about identity verification is available on the sign-in page.
What happens if you don't file taxes? ›
We calculate the Failure to File Penalty in this way: The Failure to File Penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won't exceed 25% of your unpaid taxes.
When can you file taxes? ›Key filing season dates
January 13: IRS Free File opens. January 17: Due date for tax year 2022 fourth quarter estimated tax payment. January 23: IRS begins 2023 tax season and starts accepting and processing individual 2022 tax returns.
The majority of tax dollars helps to fund defense, Social Security, Medicare, health programs and social safety net programs such as food stamps and disability payments, along with paying off interest on the national debt.
What are three things taxes pay for? ›These are Social Security, Medicare, Medicaid, and Veterans Affairs benefits and services. They're called entitlements because the government takes money out of your paycheck to fund them, so you're entitled to these benefits once you meet certain conditions.
What are the basics of taxes? ›Income Taxes are collected from people who draw an income in the US. The income taxed includes wages & salaries from employment, tips, dividends and capital gains from investments, disbursements from traditional IRAs, alimony payments and unemployment checks.
What are the 4 main taxes? ›- Income tax: This tax stems from revenue earned through a job or a personal venture. ...
- Payroll tax: This tax is deducted from an employee's paycheck. ...
- Capital gains tax. ...
- Estate tax: This tax is imposed after an individual dies and their property is transferred to a living person.
Most taxes can be divided into three buckets: taxes on what you earn, taxes on what you buy, and taxes on what you own. It's important to remember that every dollar you pay in taxes starts as a dollar earned as income.
What uses the most tax money? ›Federal government spending pays for everything from Social Security and Medicare to military equipment, highway maintenance, education, and more. In 2022, the federal government spent the most on Social Security.
Where does taxes go? ›As you might have expected, the majority of your Federal income tax dollars go to Social Security, health programs, defense and interest on the national debt.