Three-quarters of American households pay federal taxes, income taxes, or both.
If you are new to the working world or to filing your tax return, you may be wondering how much you will be giving Uncle Sam this year, and how it will be different from past years.
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.
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.
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.
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. 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%.
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.
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.
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.
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 Different Types Of Taxes And Your Tax Return
Filing your taxes can be overwhelming. With the right paperwork and basic knowledge of the different types of taxes, you will be a responsible and educated taxpayer in no time.
For more help with taxes, contact us today.