Three-quarters of American households pay federal taxes, income taxes, or both.
When it comes to taxes, most individuals have no idea which types are out there. They likely know that they have to file a tax return every year and that taxes are taken out of each paycheck, but many are clueless when it comes to understanding anything more about these taxes.
This guide will clear up all your burning questions, including the different types of taxes, what happens when you file them, and the information you need to have to make sure you have done so accurately.
What are the different types of taxes, and what can you expect when you file? Here’s where to start.
1. When To File
You will receive most of the forms you need for filing for taxes by early February. If you are an employee, you will be getting a W-2 from your employer before this time.
If you are a freelancer, you will receive a few different 1099 forms. These are used to report income other than wages, salaries, and tips.
The main you will fill out is Form 1040. It is a standard form people use to report their income, claim tax deductions and credits, and calculate the amount of the tax refund or bill for the year.Â
While the deadline for filing taxes is April 15, you will give yourself peace of mind by filing as soon as you have all the necessary documents. It will also provide you with time to get the answers to any questions you may have.Â
You should have copies of receipts for any charitable donations or medical or business expenses you will be itemizing on your return. You should also have proof of any educational expenses, state and local taxes paid, and retirement account contributions before you file.
Make sure your W-4 tax withholding form is correct. If you got married, bought a home, or had a child, your filings will be different.
You can file your taxes yourself with the help of an online system by answering a series of questions, or enlist the help of a qualified tax professional.Â
A new tax code went into effect in 2018. You may have noticed a difference in the size of your take-home pay.
Those who are most likely to see a boost in their refunds are married filers with at least two children. Others may owe more. You should expect to receive your tax refund within twenty-one days of filing.
2. Income Taxes
The primary type of tax you pay is income taxes. This comes out of most people’s paychecks. Many people overpay slightly, and the money may come back to you as a tax refund after you file.
The federal government uses a progressive system for income taxes and tax tables. This means that the more income you have, the higher your tax rates will be. Federal income tax rates range from 10% to 39.6%.Â
If you are self-employed or a freelancer, you will need to make estimated tax payments each quarter.
All states, except for seven, also have an income tax. Tax rates for states, however, are generally much lower than federal rates. States without an income tax are Texas, Florida, Nevada, South Dakota, Alaska, Washington, and Wyoming.
Nine states have a flat income tax. Under this system, you will always get charged the same percentage of your income, no matter how much money you make. If everyone is paying a 10% income tax, for example, the amount of money paid in taxes will be different depending upon your income.
States with a flat income tax rate are Colorado, Illinois, Indiana, Kentucky, Massachusetts, North Carolina, Pennsylvania, and Utah.
All other states use progressive tax brackets, just like the federal government does.
3. Local Taxes
You will also be responsible for paying taxes to your cities, towns, and local governments. These taxes are usually paid once a year or on top of your mortgage expenses each month. They are typically based on the value of your real estate, including its location, condition, and market value.
A large portion of your local taxes is for the use of local schools. They are, however, generally much lower rates than federal or state taxes.
Property taxes on Long Island, New York, for example, are some of the highest in the country. These top off at 1.9%.
You may also be responsible for paying property taxes on autos, boats, and airplanes.
4. FICA
You may notice that money gets taken out of your paycheck each month for the Federal Insurance Contributions Act (FICA.) These taxes are for Social Security and Medicare.
Taxpayers need to pay 6.5% of their income to Social Security and 1.45% for Medicare. Your employer will match your deductions for you.Â
If you are self-employed, you will be taxed for up to 15.3% of your income. 12.4% of this is for Social Security, and 1.45% is for Medicare.Â
5. Capital Gains Taxes
You will be charged for capital gains taxes if you sell an asset or valuable. This may include real estate, investments, or savings bonds.
If you owned something for less than a year before you sold it, your tax rate would be based on short-term gains. The rates for these are the same as your regular income tax rate.
Long-term gains are different from regular tax gains. If you held on to an asset for longer than a year before selling it, the state might also collect.
Capital gains tax rates have recently been raised from 15% to 20%.
The Basics on Tax Filing Timelines
You are required to file a tax return every year. This process will determine whether you owe any additional sums or if you are owed a refund. Here’s what you need to know:
- People typically receive either W-2 forms (if they are full employees) or 1099s (if they are independent contractors) from their employers in February.
- These forms are used to report your income, which includes salaries, tips, and wages.
- Once you receive these statements, you will need to fill out Form 1040.
- This is the standard form that will report your income, calculate the amount of your tax bill or refund, and where you can claim your credits and tax deductions.
Your taxes are due on or near April 15th, but it may be more beneficial for you and your peace of mind to file these tax returns as soon as you have all the required documents. This will ensure you understand any tax code changes for the upcoming year and have time to talk to an experienced tax professional who can walk you through the process.
Understanding Income Taxes
Income tax is a tax that governments impose on earnings generated by individuals and businesses. This tax is used to fund government obligations, provide goods for citizens, and fund public services, and is broken into personal and business categories.
Personal Income Taxes
This type of income tax is levied on an individual’s salaries, wages, and other income types.
Business Income Taxes
These taxes apply to partnerships, small businesses, corporations, and those who are self-employed.
The federal government uses a progressive system for income taxes, meaning the more income you have, the higher your tax rates will be. Some states have flat income taxes, however, meaning their taxpayers will always be charged the same share of income no matter how much they make.Â
Discussing your income taxes with a qualified tax professional can help you understand the type of system your state uses and whether your state even has an income tax.
A Deeper Look at Local Taxes
Many individuals will also be responsible for paying taxes to their towns, local governments, and cities. A few notes on local taxes:
- These sums are typically paid once per year or in addition to mortgage expenses paid monthly.
- A large portion of these local taxes may fund public services such as garbage collection, sewer maintenance, and even education programs.
- They can come in many different forms, including payroll taxes, property taxes, sales taxes, and licensing fees.
Local taxes can also vary substantially from one jurisdiction to the next, making it important to consult with a tax professional who is well-versed in your region’s tax code.
What You Should Know About FICA
The Federal Insurance Contributions Act (FICA) is a law that mandates a payroll tax on the paychecks of employees and employer contributions to fund the Social Security and Medicare programs. When it comes to FICA, it is vital to understand that:
- It is taken directly from a worker's gross pay.
- You cannot opt-out from these taxes.
- Employees and employers both pay FICA taxes.
- The amount of the FICA taxes withheld depend on your gross wages.
These FICA rates are set annually, even though they may not necessarily change every year. Filers should always check the rates to make sure they understand any changes, as more funds taken from their paychecks may mean they need to plan accordingly.
Digging Into Capital Gain Taxes
Capital gains are the profits you receive from the sale of an asset, and can include shares of stock, cryptocurrency, savings bonds, a piece of business, or land. These capital gain taxes are usually considered taxable, and the amount you are taxed will depend on how long you held your asset before selling it.
Short-Term Gains
If you owned an asset for less than a year, you would be taxed on short-term gains. These rates are often the same as your regular income tax rate.
Long-Term Gains
If you hold onto an asset for longer than a year before selling, the tax on these profits will depend on your taxable income and filing status. These taxes are generally lower than the short-term capital gain tax rate, though.
One important note about capital gains taxes is that the rates apply to most assets, but there are distinctive exceptions. Talk to a tax professional if you believe you may need to pay any capital gain taxes so you can figure out what you might owe.
Different Types of Income Tax Returns
You have three forms from which to choose when filing an income tax return, including 1040, 1040A, and 1040EZ. Each is designed to get the appropriate amount of money you owe to the Internal Revenue Service (IRS), but filing the wrong one can cost you.
1040EZ
This is the shortest and most straightforward of the forms. It restricts filers to claiming just one credit — the earned income tax credit (EITC) — which helps those who do not make much money.
1040A
This form is slightly more complicated than the 1040EZ. Individuals who choose to file this form can claim several tax credits that are not available with the EZ in addition to the EITC.
1040
This form is the longest, most detailed, and most complicated out of the three. Individuals who choose this form often have large earnings, itemized deductions, or more complex investments.
It may be worthwhile to examine the longer form 1040 even if you are eligible to file one of the simpler 1040 forms, as the 1040 can provide taxpayers with more opportunities for tax breaks. Your tax professional will help you determine which is best for you.
Get Expert Help with Your Tax Filing Questions
Filing taxes can be a tedious and overwhelming process as well as extremely stressful. Fortunately, you do not have to handle this process alone. Contact Silver Tax Group today to speak with an expert about any questions you might have regarding these different types of taxes, and let us show you how we can help.
