Federal Income TaxesJune 8, 2022
Federal Income Taxes are a percentage of an individual’s or business’s income paid to the government and used to fund public goods and services.
If you understand how these taxes work and their purpose, you can better appreciate the benefits and better account for the loss.
Federal income taxes are charged only on taxable income. This includes earned income (the money you get in exchange for work) and unearned income (money you didn’t explicitly do something at the time to get, such as investment gains or interest). Things that don’t count as taxable income include child support payments, life insurance payouts, and scholarships. For more information and specifics on what qualifies, check out the IRS’s write-up on the topic.
Paying Federal Income Taxes
All federal income taxes must be paid by tax day—on or near April 15th—every year. If you work for an employer, they’ll withhold part of each paycheck to help account for these taxes.
If you’re self-employed and made over $400 in net income after expenses, you’ll need to take care of federal income tax yourself. To do this, you’ll make quarterly payments to the IRS. These payments are based on what you think you’ll make during the year. They also need to account for your share of Social Security and Medicare, since you don’t have an employer to take those out or contribute to it for you. To learn more about how being self-employed impacts your taxes, read this article by the IRS.
Come tax time, you’ll submit your return, which contains records of your income, how much you owe in taxes, and how much federal income tax you paid during the year. If the total owed is above what you’ve paid, you’ll have to cover the difference. And if it’s less, you’ll get a refund.
Of course, more things than just federal income taxes factor into your overall tax situation (things like deductions, credits, status, and dependents will make a big difference), so whether you get a refund or have to pay isn’t as straightforward as a simple subtraction based on percentages.
Federal income tax is taxed progressively. This means that the government creates brackets, or categories, and the money that falls into each bracket is taxed at a specific percentage. Even if you fall into the highest tax bracket, that doesn’t mean all of your income will be taxed at the highest rate.
The percentage from each bracket is then added together to get how much you owe in federal income taxes. Check out this article to learn more about tax brackets.
How Tax Money is Spent
Tax money is spent based on the budget set by Congress and the president. In general, the funds go to support various programs, goods, and services throughout the country. The four areas that take the largest chunks are:
- Health programs like Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP)
- Social Security
- Aid and safety net programs like unemployment insurance and food stamps
- National defense and security
If the money from taxes won’t cover everything that needs to be funded, Congress will have to adjust the budget, find money elsewhere, or raise taxes. Voting in local and state elections is the best way to make your personal priorities known, whether those priorities relate to how high taxes are or what the money is going toward.
Overall, while it may be frustrating to feel like you’re losing the money you’ve earned, the federal income tax helps fund important goods and services that benefit you and others throughout the country.
This article has been republished with permission. View the original article: Federal Income Taxes.