Taxes are everywhere. Consumption, investment gains, property and your income. If you haven't started working yet you may not know the impact of taxes. If you have a job, or get one soon, you will experience the effect of taxes.
There isn't a way to avoid paying taxes (legally at least), but we will explain how you are taxed, how to file your tax return and some useful deductions to remember when you file your return.
There are different types of taxes, but for the purpose of this article we are only focusing on taxes that are taken out of your paycheck. When you receive your paycheck you will notice you have two incomes. A gross income which is the amount you would make with no deductions. Then there is the net income and this is the amount you actually receive once all deductions are made. When discussing your paycheck the primary taxes you will be subject to include:
Federal Taxes: Used by the government to provide services to the American public. These services include health programs, defense, veteran benefits and others. Everyone experiences federal taxes.
State/Local Taxes: Applicable in most, but not all, states. These taxes are used for education, environmental programs, economic development and many other purposes within the state.
Social Security: Pays for disability programs, retirement, survivor benefits and Medicare.
Medicare: Funds the Medicare Hospital Insurance for seniors.
Your federal tax liability will vary depending on your income level. The 2017 tax brackets are:
The amount withheld for Social Security and Medicare is determined by The Federal Insurance Contribution Act (FICA) and is currently set at:
6.2% for Social Security
1.45% for Medicare
0.9% Medicare surtax (applicable to those making > $200,000 per year)
Each employee is subject to the FICA and so is your employer. So while you will have the above percentages taken out of your paycheck, your employer will also pay the same amount as a tax.
Ready to learn about filing your taxes?