Paying Taxes in the US

Taxes are money paid by U.S. citizens and residents to federal, state, and local governments. There are different types of taxes, such as income tax, sales tax, and property tax.

Income tax

Prior to the 16th amendment to the US constitution in 1913, the constitution outlawed federal income tax. Those days are gone. The US government (federal, most states, and some local governments) now takes a sizeable chunk of your income in the form of income tax.

Income tax is charged by:

• The federal government
• Every state except Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income. If you have a choice, moving to any of these 9 states can save you money.
• Some local governments, such as New York City, also charge city income tax.

This can add up. If you live in New York City, in addition to your federal income tax, you have to pay state income tax of up to 7.7% and city income tax of up to 3.64%.

“Taxable income” is money that you get from wages, self-employment, tips, and the sale of property. Most people pay income taxes by having money withheld from their paycheck (federal, state & local). The amount of income tax you must pay depends on how much you earn. Income tax rates are lower for people who make less money. Anyone who earns income, resides in the United States, and meets certain requirements needs to file a tax return and pay any taxes they owe.

Social Security and Medicare taxes

These federal taxes (social security and medicare taxes) are withheld from your paycheck. Social Security provides benefits for certain retired workers and their families; certain disabled workers and their families; and certain family members of deceased workers. Medicare taxes pay for medical services for most people over age 65. In most cases, you must work a total of 10 years (or 40 quarters) over the course of your life to get Social Security retirement benefits and Medicare benefits. You may need fewer than 10 years of work to get disability benefits or for your family to get survivors’ benefits based on your earnings.

Sales tax

Sales tax is charged at state and local levels. These taxes are added to the cost of buying certain things at time of purchase. Sales tax is based on the cost of the item. Sales tax helps pay for services provided by the state and local governments, such as roads, police, and firemen.

Property tax

Property tax is charged at state and local levels, on the value of your house and land. Property tax is tax that is imposed on persons because of their ownership or possession of property and is measured by the market value of your property. In most places, property taxes help support local public schools and other services.

Filing your tax return / Getting help

You are required to file tax returns (forms on which you calculate your tax and submit to federal and/or state and/or local governments) every year.

• Federal Tax Return: Your must file a federal tax return (Form 1040) by April 15 or at least an extension. The tax return covers your earnings for January to December of the past year.
• State/Local Tax Return: If you live and/or work in a state or locality where the government charges income tax, you also have to file an annual state and/or local government tax return. Check with your state/local government as to whether you have to file a return and the filing deadline.

You can reduce your state and local income tax load by moving to and working in one of the nine states that do not have income tax. As to federal tax reduction, your only choice is to become active in the political process and vote for politicians who promise to reduce federal income taxes.

Take paying taxes and filing your annual tax returns very seriously. Not paying taxes or under-reporting income is a serious offence, and will get you in a boatload of trouble. File your tax return every year without fail.

You can get free help with your tax return at an IRS Taxpayer Assistance Center. You don’t need to call ahead. Taxpayer Assistance Centers are located in communities across the United States. You can go online to find the Taxpayer Assistance Center where you live, or to get help by phone, call the IRS at 1-800-829-1040.