What Are Taxes? Taxes are mtax lawyer andatory 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. In economics, taxes fall on whoever pays the burden of the tax, whether this is the entity being taxed, such as a business, or the end consumers of the business’s goods. From an accounting perspective, there are various taxes to consider, including payroll taxes, federal and state income taxes, and sales taxes. Key TakeawaysTaxes are mandatory contributions collected by governments. The Internal Revenue Service (IRS) collects federal income taxes in the United States. There are many forms of taxes; most are applied as a percentage of a monetary exchange (for example, when income is earned or a sales transaction is completed). Other forms of taxes, such as property taxes, are applied based on the assessed value of a held asset. Understanding what triggers a tax situation can enable taxpayers to manage their finances to minimize the impact of taxes. Understanding TaxesTo help fund public works and services—and to build and maintain the infrastructure used in a country—a government usually taxes its individual and corporate residents. The tax collected is used for the betterment of the economy and all who are living in it. In the United States and many other countries in the world, income taxes are applied to some form of money received by a taxpayer. The money could be income earned from salary, capital gains from investment appreciation, dividends or interest received as additional income, payment made for goods and services, etc.Tax revenues are used for public services and the operation of the government, as well as for Social Security and Medicare. As baby boomer populations have aged, Social Security and Medicare have claimed increasingly high proportions of the total federal expenditure of tax revenue. Throughout U.S. history, tax policy has been a consistent source of political debate. A tax requires a percentage of the tax attorney taxpayer’s earnings or money to be taken and remitted to the government. Payment of taxes at rates levied by the government is compulsory, and tax evasion—the deliberate failure to pay one’s full tax liabilities—is punishable by law. (On the other hand, tax avoidance—actions taken to lessen your tax liability and maximize after-tax income—is perfectly legal.) Most governments use an agency or department to collect taxes. In the United States, this function is performed federally by the Internal Revenue Service (IRS). There are several very common types of taxes:Income tax—a percentage of generated income that is relinquished to the state or federal governmentPayroll tax—a percentage withheld from an employee’s pay by an employer, who pays it to the government on the employee’s behalf to fund Medicare and Social Security programs Corporate tax—a percentage of corporate profits taken as tax by the government to fund federal programsSales tax—taxes levied on certain goods and services; varies by jurisdictionProperty tax—based on the value of land and property assetsTariff—taxes on imported goods; imposed with the aim of strengthening internal businesses Estate tax—rate applied to the fair market value of property in a person’s estate at the time of death; the total estate must exceed thresholds set by state and federal governmentsTax systems vary widely among nations, and it is important for individuals and corporations to carefully study a new locale’s tax laws before earning income or doing business there. Below, we will take a look at various tax situations in the United States. Generally speaking, the federal government levies income, corporate, and payroll taxes; the state levies income and sales taxes; and municipalities or other local governments mainly levy property taxes. Income taxLike many nations, the United States has a progressive income tax system, through which a higher percentage of tax revenues are collected from high-income individuals or corporations than from low-income individual earners. Taxes are applied through marginal tax rates. A variety of factors affect the marginal tax rate that a taxpayer will pay, including their filing status—married filing jointly, married filing separately, single, or head of household. Which status a person files can make a significant difference in how much they are taxed. The source of a taxpayer’s income also makes a difference in taxation. It’s important to learn the terminology of the different income types that may affect how income is taxed. Capital gains taxes are of particular relevance for investors. Levied and enforced at the federal level, these are taxes on income from the sale of assets in which the sale price was higher than the purchasing price. These are taxed at both short- and long-term rates. Short-term capital gains (on assets sold one year or less after they were acquired) are taxed at the owner’s ordinary income tax rate, but long-term gains on assets held for more than a year are taxed at a lower capital gains rate, on the rationale that lower taxes will encourage high levels of capital investment. Tax records should be maintained to substantiate the length of ownership when both the assets were sold and the tax return was filed. Payroll taxesPayroll taxes are withheld from an employee’s paycheck by an employer, who remits the amount to the federal government to fund Medicare and Social Security programs. In 2021, employees pay 1.45% into Medicare on all wages and 6.2% into Social Security on the first $142,800 earned; in 2022, this Social Security wage base limit increases to $147,000.