From a very early age, taxes are somewhere on our radar. You’ve heard Benjamin Franklin’s old joke about the only two certainties in life, “Death and taxes.” Even at nine years old, you’re taxed in restaurants and games of Monopoly. But when your parents finally sit you down to have those big talks growing up, none of those talks are about how to pay your taxes, or even understanding taxes in the first place.
So, let’s take a second to finally have that talk. Because as Marcus Lemonis would say, when it comes to taxes, everyone has a ton of “Skin in the game.”
What Are Taxes?
In the simplest terms, taxes are when the government “passes the hat” and everyone throws in a few bucks. This happens in a few different ways and we’ll explain how taxes are paid later on. But when it comes to understanding taxes, the ultimate goal is to raise a community fund that pays for all the essentials. And as it turns out, communities have a ton of essentials. So, that fund needs to be extremely large. Everyone needs to chip in quite a bit of money, and how that money is spent shapes our entire society. So, needless to say, taxes can be a pretty emotionally charged topic. In fact, sometimes people feel so strongly about taxes that they’ve actually fought wars over it, as The British Colonies did when they fought The Revolutionary War and formed The United States of America. But regardless of which country you’re in, taxes, and the people who pay them, keep our communities running. So, knowing how to pay your taxes, and understanding taxes, are both huge parts of maintaining our collective lifestyle. The former Supreme Court Justice Oliver Wendell Holmes once said, “Taxes are the price we pay for a civilized society.” So, let’s take a huge leap towards understanding taxes by getting a sense for what they actually fund.
Taxes Fund Our Community Services
Taxes don’t usually generate a ton of enthusiasm, but maybe understanding taxes can help with that. Because they’re an incredible example of teamwork and generally considered to be in everyone’s best interest. For example, the earliest fire departments were privatized, which was a total nightmare. If your house was burning down, hopefully a private firm would show up with a bunch of water, so you could agree on a “fair” price while your house was burning to the ground. But when everyone knows how to pay their taxes, and most importantly, does, you solve all that.
Taxes pay for our community’s fire department, police department, and post office. Pooling your funds leads to a ton of value you couldn’t unlock at the individual level. Imagine if aliens attacked Charlotte, North Carolina. You could either call Will Smith’s character from “Independence Day,” or learn how to pay your taxes and help fund our standing military.
Taxes Pay for Infrastructure
Now, think of all the infrastructure that makes your life “go.” Taxes pay for all of that, too. The highway system and paved roads are a prime example. You might not love driving up to a bunch of road construction, but it’s the entire reason we don’t have to take The Oregon Trail to work every morning. Then you have tunnels. Not only are they great for carving shortcuts through the mountains, but they’re the perfect way to “accidentally” drop those unwanted phone calls. Taxes also pay for our sewer systems, which certainly beat the “bucket method” from The Middle Ages.
They even fund our bridges so you don’t have to float your wagon across a river. Sure, taxes aren’t a ton of fun when you notice your paycheck is a little light. But understanding taxes helps that all go down a little smoother. When you see the clean water flow out of your faucet, taxes don’t feel like a burden anymore. They feel more like magic.
They Also Pay for Community Institutions
Marcus’ “Know your numbers” philosophy comes into play big time when it comes to understanding taxes. Think about paying for a kid’s entire education from start to finish. The cost and logistics would be pretty… cumbersome. But through the power of taxes, you pool your resources with an entire community that funds our public education system, hires the teachers, sets the curriculum, and keeps the lights on in the classrooms. The same goes for the legal system. You have the right to a fair and speedy trial, and it’s your tax dollars that pay for all of those courtrooms, judges, and public defenders.
You keep your community safe with publicly funded jails, and knowing how to pay your taxes might even keep you out of those jails. Your taxes even help fund social security, so as you get older, great news: you’ll probably be reunited with some of those taxes to help supplement your retirement.
Taxes Fund Humanitarian Efforts
Understanding taxes might help you feel better about paying them already. But here’s something you can definitely feel good about: taxes are a huge part of helping people. They provide an important safety net to people who’ve fallen on hard times, whether that’s through food cards or transitional housing. You also see the government sending a ton of aid overseas, which can help developing nations or communities hit hard by war and famine. Now, think about natural disasters. Your taxes fund programs like FEMA, which kickstart much of the rebuilding process after things go sideways.
Your taxes even pay into medical research. So, whether it’s developing vaccines, cancer treatments, or tackling AIDS, learning how to pay your taxes means learning how to help build a better tomorrow.
The Different Types of Taxes
Think of direct taxes as whenever you pay the government directly. The first example that probably comes to mind is when you pay your personal income taxes. A portion of whatever you make goes towards the federal, state, and local tax base. Corporations pay these too, and likewise, pay them directly to the government. You also pay taxes on miscellaneous sources of income, like when you profit off of investments, are given an inheritance, or receive a large gift. Notably, this category also refers to property taxes, which both individuals and corporations are subject to. So, when you’re wondering how to pay your taxes, you’re thinking of direct taxes. Because as you’ll see below, someone else takes care of all those indirect taxes for you.
Let’s say you go into a 7/11 and buy a Gatorade. You pay a small tax on it, which is added right there and then. The same goes for when you buy a car. You also pay taxes when you eat out at a restaurant. But here’s what makes them indirect taxes: you pay them to the merchant and then they pay the government for you. In other words, they’re collecting these taxes on the government’s behalf. Another way to think of indirect taxes is whenever you’re paying taxes on a transaction. So, this obviously applies to taxes on goods and services, like you’ve seen above.
But it also applies to commercial goods coming through customs, securities transactions, or something called a “Value Added Tax,” which is assessed when value is added through the supply chain. Again, if it seems like you pay a lot of taxes, just smile knowing that everyone’s in the same boat. Think of paying taxes as a bonding experience.
How to Pay Your Taxes
Telling the Government How Much You Owe
Step one is really just figuring out how much money you owe and communicating that to the government. Before you dive in, you have to ask yourself a very easy, but very important question: Can I figure this out myself? If you’re a senior in high school, or you just have a single source of income, your taxes are probably fairly manageable. Programs like TurboTax can walk you through everything, and what’s more, they have a free version. So, you might want to take a crack at these yourself. But if you run three companies, bought a house this year, and got pretty into buying stock, your taxes will be a little more complex. People definitely still do complex taxes themselves, but you might consider hiring an accountant. Sure, it’ll cost you, but think about how much your time is worth. Now, think about the fact that accountants might know about a lot of deductions that you weren’t even aware of. When you think about it like that, an accountant can quickly pay for themselves. You can always give your taxes a go with the free software, and if it feels like you’re out of your comfort zone, hire some help. But once you figure out how much you owe, you communicate that to the government through a process called “filing your taxes.” The IRS allows you to do this through the “IRS Free File” feature on their website. Make sure you file your state taxes as well, along with any others that apply. The taxes you need to file are informed by the specifics of your life. For example, in some cities, if you have a company, you’ll owe a city business tax. So, once you sort all of that out and file everything, all that’s left to do is pay up.
Getting Your Tax Money Where It Needs to Be
For indirect taxes, the merchant is typically paying these. So, when it comes to how to pay your taxes, you’re mostly concerned with direct taxes. The most simple form of paying up is when you mail both a check and something called a “voucher” to whichever government entity you’re paying. The voucher is just a form that says how much you owe, and when the government processes the corresponding check, you’re all set. There’s also an electronic version of the same experience, where you get to settle up without actually sending them a piece of physical mail.
Sometimes you don’t even owe anything. If you’re a salaried employee, oftentimes your check is run through a payroll company. Sometimes you make withholdings, where you basically ask the payroll company to pay some of your taxes in advance. That’s when you might end up with a refund. You still file your taxes, but if you overpaid, the government actually sends you a check.
Five Things to Know About Taxes
Taxes Are Part of Economic Policy
You hear so much talk about taxes going up and down that sometimes people lose sight of the fact that taxes have huge implications. For example, the government might give corporations a huge tax break if they’re hoping to encourage more hiring. They might even give people a tax break if they want you to have more disposable income. Their hope is that you have more money to throw around, support businesses, and stimulate the economy. But usually when the government waves that tax wand, they’re trying to do something big.
Taxes Are Serious Business
The government, like most people, likes to get paid on time. So, make sure you’re tracking due dates and always stay a step ahead of the game. Because if you’re late on payment, you’re in for some late fees. Look at it like any project. Build in a buffer and don’t wait until the last minute. That way, you have plenty of time to troubleshoot issues and still get your taxes paid on time. Late fees, and in some extreme cases, jail, could potentially be in play if you don’t know how to pay your taxes. So, get a jump on your taxes and you’re sure to be in great shape.
The better your records, the more painless the tax process becomes. So, every time you make some money, make sure you have meticulous records of that. If you’re salaried, this will be way easier. If you’re self-employed, it’ll take a little more diligence. But it’s worth it when it comes time to pull your tax forms together. Also, keep a great record of all your expenses. It’s so easy to lose track of the receipt for that new office printer. But stop thinking of it as a receipt and start thinking of it as money. Because when it comes time to write off your expenses, it is.
“The Tax Man” Wants You to Save for Retirement
If you have a little extra money to put towards retirement, look into an IRA. The government cuts you a huge tax break through these because IRAs allow your money to grow tax free. If you want to understand why that’s a big deal, pull up a compounding interest calculator online and start playing around. You’ll quickly see how this account starts to snowball. The fact that it’s snowballing tax free means the size of that snowball is even larger at the finish line. Take full advantage of this perk and you’ll see that a lot of the tax code is geared towards helping you.
There are many different types of IRAs with different contribution limits and tax implications. Your tax advisor will be able to look at your overall financial picture and suggest the best option for you.
Research Surprising Deductions
You might want to literally Google “Surprising Tax Deductions.” Because for almost everyone, the answers help open the door to a ton of savings. Did you know that you can write off most charitable contributions? How about certain types of health insurance premiums? What about your mileage when you’re driving to job interviews? You’ll find a ton of deductions you might not have thought of otherwise. So, be sure to bring these up with your tax advisor to see which ones you can take advantage of.
While we hope this went a long way towards helping you understand your taxes, it’s really important to know that this was just to help you get your feet wet. Think of this as a preliminary overview. Taxes can be fairly complex, especially if you’re running a business. But they don’t have to be intimidating. Once you know how much cool stuff they’re paying for, and that a lot of the tax code is designed to help you, taxes stop feeling like they’re here to hurt you. They start feeling more like they’re here to help.
- Do you know everything your taxes are paying for?
- Are you missing out on taking advantage of any deductions?