Taxes

Taxes are mandatory contributions you are required to make to local, state and federal governments. Taxes in the U.S. come in a wide variety of forms including income taxes, property taxes, sales taxes and many others.

In 2019, Americans paid $1.6 trillion in income taxes off a gross adjusted income of $11.9 trillion, according to the Tax Foundation. Taxes are not only important because of how much of your income they take, but also because of what you get in return.

Governments rely on taxes as their main revenue source. This money funds public programs, work and services. Taxes provide the money necessary to maintain your local and national infrastructure, such as emergency and welfare programs.

Different levels of government – federal, state and local – pay for different public services, but sometimes they may overlap. For example, all three levels of government pay for different costs associated with roads, education and some other services.

Most of the taxes collected by the federal government go to national defense, Social Security, Medicare and other health or social programs.

The federal government routinely spends more money than it collects from taxes and other forms of revenue. As of Jan. 2023, the national debt – the amount of money the federal government owes – was more than $31.4 trillion, according to the Peter G. Peterson Foundation.

State spending varies depending on a lot of different factors, from population to overall wealth to the amount of taxes they collect. But education is the single biggest expense for every state in the union.

State and local taxes often go to the same service – public schools are a good example. The state may fund part of the costs and local counties, cities or school districts spend local taxes on them as well.

Combined spending on elementary, secondary and higher education accounts, on average, for nearly a third of state and local expenditures, according to the nonprofit Urban Institute.

Public welfare costs include most Medicaid costs while police spending also includes money spent on courts and correctional facilities in the Urban Institute analysis.

State and local governments spent roughly $4.44 trillion in 2020, according to U.S. Government Spending.

Taxes come from a variety of sources. The nature of what is taxed and the method required to collect the tax often determines the different types of taxes. Understanding taxes can help you better manage your personal finances.

Taxation on annuities is a bit different; here, taxes aren’t due until you start to receive income payments from your annuity.

For most Americans, the term “filing your taxes” applies to your federal and state income tax returns. It means providing information about your income and other information to make sure that you pay the amount of taxes you owe on your income.

You can file paper returns or file your income taxes online. You can file your taxes yourself, you can pay a tax preparer to do the work for you or you can use a digital filing service.

Typically, income tax filing software will let you do your state income tax returns as well – without having to reenter all the information from your federal income tax return.

Deadlines for filing your state income tax return vary from state to state. You should check with your state to determine when your state forms are due.

Other taxes are collected in other ways and can vary from state to state and from tax to tax.

For example, local governments may send you an annual bill for property taxes. Or you may have to pay property taxes whenever you renew your driver’s license or car tags.

Sales taxes are collected whenever you buy something – simply added onto the price rung up at the cash register. Tariffs are added to the price of an item before you buy it.

Tax deductions are a personal or business expense that reduces how much of your income is subject to tax. These typically fall into two categories – standard and itemized deductions.

The federal income tax standard deduction reduces your taxable income based on your filing status, age, whether or not you are blind and how many dependents you have.

Itemized deductions are different expenses you’ve had that the law lets you claim to reduce your taxable income.

Tax filing software typically walks you through potential deductions. Tax preparers can also help you find deductions. If you are preparing your own tax return, you should use IRS Schedule A (Form 1040), Itemized Deductions when filing your taxes.