ALB Finance

First things first:

– Tax is money you have to pay to the government. They use this money for various government programs available to citizens of that country.

– This article is educational, not political. I will not be sharing any political stances and cannot answer questions regarding political party tax legislation. My expertise is in finance and economics, and I will stick to topics regarding those subjects. 

– This information is based on the American tax system, but similar concepts apply to many other countries. 

Finance Foundations

The first thing we should talk about is what taxes you (probably) pay. This is a personal finance article after all! There are several types of taxes, and we’ll dive a bit into each of them, but remember – this is the tip of the iceberg. Taxes can get complicated, so we’ll do a general overview of the important stuff you need to know!

Federal vs. State and Local Tax:

Some taxes are paid to the state or county you live in, and some taxes are paid to the Federal government. Federal taxes go towards programs that are for the whole country. State and local taxes go towards programs specifically for your state or county. For example, your county library is paid for mostly by state and local taxes. On the other hand, things like national defense and social security are paid for by federal taxes. 

Sales Tax:

This is the tax you pay when you buy something. If you go to a coffee shop and purchase a cup of coffee listed for $6.00, your total will come up to about $6.39 (For this example I am using the average sales tax rate in America which is 6.44%). The price of the coffee is $6.00, but you will pay $0.39 in sales tax. The price plus the sales tax makes up the total amount you pay for your coffee.

The sales tax rate is different based on where you live. If you live in South Carolina, your sales tax will be about 6%, but in Indiana it will be about 7% (Tax Foundation, 2023). I’ll work out the math for this below, but if you don’t think that will be helpful for you, just skip on down to the next section. 

South Carolina:

The price for the coffee is $6.00

South Carolina’s tax rate is 6%

6% of $6.00 is $0.36

$6.00 x 0.06 = $0.36

The total amount you will pay is $6.36

$6.00 price + $0.36 sales tax = $6.36

Indiana:

The price for the coffee is still $6.00

Indiana’s tax rate is 7%

7% of $6.00 is $0.42

$6.00 x 0.07 = $0.42

The total amount you will pay is $6.42

$6.00 price + $0.42 sales tax = $6.42

Income Tax:

When you buy things with your money you pay sales taxes. When you make money, you pay income taxes. Income tax is money taken out of your paycheck and sent to the government. It is different depending on how much money you earn. For this example, we are going to keep it simple and study Jack Russell Terry-Orr, a single man making $10,000 per year. People that are single and make $10,000 / year pay 10% income tax (IRS, 2023). 

Mr. Terry-Orr earns $10,000 per year. That $10,000 is his Gross Pay, which just means that’s how much money he makes before paying taxes. Since he is supposed to pay 10% Income Tax, let’s do some math to figure out how much money he makes after taxes. 

$10,000 Gross Pay

10% Income Tax

$10,000 x 0.10 = $1,000

Jack Russell Terry-Orr must pay $1,000 in income taxes per year

$10,000 Gross Pay – $1,000 Income Tax = $9,000 After Taxes

So Mr. Terry-Orr will make $9,000 per year after taxes! 

Keep in mind that this example has been kept simple for illustration purposes. The median household income in America is $75,000, but to use that as an example would mean getting into tax brackets. I referenced this briefly earlier – tax brackets determine how much income tax you pay, and they differ depending on how much money you earn. 

It is also important to note that you will pay federal, state, and local income tax. For this example, we talked about federal income tax, but in real life, you would pay state and local income tax as well. 

Property Tax:

If you own a house, you will have to pay taxes on that house called property taxes. These taxes are paid to the state you live in, and the amount you pay will depend on which state you live in. Whether you have a mortgage and are still paying off your own or fully own your home, you have to pay property taxes. State property taxes range from 0.3% to 2.5% per year. Lets do an example!

Chartreuse owns a $300,000 house in the state of North Dakota. Her property taxes are about 1% per year (Forbes, 2023). Let’s figure out how much she needs to pay in property taxes each year and how much she needs to pay each month!

$300,000 home

1% property tax in North Dakota

$300,000 x 0.01 = $3,000

Chartreuse will pay $3,000 each year in property taxes…

$3,000 Property Taxes per Year ÷ 12 Months per Year = $250 Property Taxes per Month

… and she’ll pay $250 Property Taxes each month!

Other Types of Taxes:

In addition to Sales Tax, Income Tax, and Property Tax, there are other tax types that we will not discuss today. Some other tax types are:

– Capital Gains Tax (the tax you pay when you make money from investing)

– Tariffs (tax on goods you bought from another country)

– Gift Tax (tax on money you receive from another person, such as a family member)

– Luxury Tax (tax on goods you buy that are considered ‘luxury’ like luxury cars, alcohol, or expensive jewelry)

For today, we’ll leave the list there, but there are lots of other types of tax as well. If you’re really interested in tax, you can absolutely research this more. However, this article is meant to be a general overview for people who want enough knowledge of tax to be able to live normal lives! For that reason, we’ll wrap it up here. 

Summary:

– You pay State and Local Taxes based on where you live. Everyone pays Federal Taxes.

– When you buy something, you’ll pay Sales Tax in addition to the price of that thing.

– Some of your paycheck will be sent to the government to pay Income Taxes. The amount sent will depend on how much money you make. 

– If you own a home (or real estate in general), you will pay taxes for that home – even if you’ve paid off your mortgage. 

– There are other types of taxes like Capital Gains Tax, Tariffs, Gift Tax, and Luxury Tax just to name a few.

– You are capable, competent, and you can do this! Taxes are complicated, but you’re smart. Keep learning and researching and I promise it will start to make sense. 

References:

(July 17, 2023). Tax Foundation. State and Local Sales Tax Rates, Midyear 2023. Retrieved from: https://taxfoundation.org/data/all/state/2023-sales-tax-rates-midyear/ 

(November 9, 2023). IRS. IRS provides tax inflation adjustments for tax year 2024. Retrieved from: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024 

DePietro, A. (September 1, 2023) Forbes. Property Taxes By State: A Breakdown Of The States With The Highest And Lowest Property Taxes In 2023. Retrieved from: https://www.forbes.com/sites/andrewdepietro/2023/09/01/property-taxes-by-state-a-breakdown-of-the-highest-and-lowest-property-taxes-by-state/?sh=45985df2441b