What are Taxes?

Understanding How Your Taxes Work

Schools, roads, parks, hospitals, and other public works and services rely on you and your neighbors, businesses, organizations, and estates to pay taxes that will help fund their budgets. Understanding how taxation works can give you a big picture idea about the ways your money gets taxed and empower you to take greater control of your finances. And a financial advisor can also help you align your tax strategies to reach your financial goals.

What Are Taxes?

Taxes are money collected by the government for the purpose of funding government operations. Before the income tax, the US government mostly funded its operations with import taxes known as tariffs.

These days, Americans pay many types of taxes. They include income taxes, property taxes, sales taxes, sin or excise taxes, capital gains taxes, and estate taxes. People disagree about how high taxes should be. Some say that when taxes are too high the economy can’t grow. Others argue that robust taxation helps distribute income and provide for the common good.

One of the aspects of taxation that’s hard for some people to accept is that pretty much everyone pays for something they don’t use, and a lot of us pay for things that we don’t like. For example, your taxes may help fund public schools that your kids don’t go to or policies you don’t agree with. That – and the bite taxes take out of our budgets – is part of why raising taxes can be a tough sell politically.

Unless you don’t work or you work under the table, you prepay part of your tax bill throughout the year through payroll taxes. Payroll taxes deduct tax money from your paycheck and from your employer’s coffers to help pre-pay your income taxes and to pay your Social Security and Medicare taxes.

Your pre-tax earnings get reduced by approximately 30% before they hit your bank account, which is why post-tax earnings are always lower than the salary you negotiated with your boss when you decided to take the job. That is why it’s important to know the difference between pre-tax and post-tax dollars. SmartAsset can help you figure out how much you will earn after taxes with our paycheck calculator.

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