Posted by Pat Raskob

Tax Basics: A Guide for Beginners

Tax Basics: A Guide for Beginners

The legislative arm of the government, known as Congress, is in charge of formulating the Internal Revenue Code (IRC), also known as the tax code. This tax code guides tax collection, how tax rules are enforced, circumstances surrounding refunds, credits and rebates. 

In the United States, the agency responsible for the activities outlined above is the Internal Revenue Service (IRS). No one is exempted from paying tax, as you are paying tax even if you are not aware – on a tin of milk, gas, every time you refill your vehicle, and capital gains tax directed on a $2 million sale of stock. This makes it essential for everyone to have a basic idea of how the US tax system works.

 

Interpretation of the Tax Code 

There are IRS regulations that guide the interpretation of the US tax laws for the agency. However, not all tax codes come with a regulation, so Uncle Sam employs ruling from revenue, procedures from revenues, and letter ruling for guidance. 

While Uncle Sam is authorized to provide its interpretation of what such tax code entails, it is the duty of the court system at the federal level to shed light on tax code and explain to people what Congress intended for interpretation. The national court system is a member of the judicial arm of the government.

 

What Government Does with the Taxes

There are various types of tax collected by the US government. Examples are income taxes, sales taxes, real estate taxes and sales taxes from companies and individuals. These funds are distributed based on budget and directed to various agencies and used for different purposes ranging from education to social security to national defence, national parks, and also government welfare services.


How the US Government Collect Citizen’s Income Taxes 

Income taxes power the revenue for the budget of the government. Income taxes are collected all year round through withholding from the user's paycheck. By the designated time every year, everyone that got an income needs to file and submit a tax return to know if Uncle Sam got the correct tax amount via withholding or if they deserve some refunds for paying excess taxes.

 

Understanding Taxable Income 

Uncle Sam can tax two income types: earned and unearned income. Examples of earned income are wages, tips, salary, sick pay, bonuses, commissions, unemployment benefits, fringe benefits that are non-cash, etc. 

On the other hand, unearned income that can be taxed are dividends, rents, interest, royalties, profit from an asset sale, winnings from gambling, alimony, farm and business income, etc. You can bring down your taxable income by directing funds to your retirement accounts such as an IRA or a 401(k).


What are Deductions?

There is some expense type that the government permits taxpayers to deduct from your AGI (Adjusted Gross Income). It can also be deducted from the gross income less the adjustments. When you file taxes using the standard deduction route, you can remove some certain income from your taxable income via a typical amount set aside by the federal government, alongside the filing status. Also, by itemizing some type of expense and summing it up, you get a value that you can deduct from the taxable income. You can itemize expenses: local and state taxes, charitable contributions, mortgage interest, and medical expenses.

 

Always Work with a Tax Attorney 

Taxes are complicated, so it is not surprising that people make a mistake and Uncle Sam could be quite hard. Also, when you consider that the tax situation differs for everyone, and you cannot get any tangible assistance via a simple Google search, it is essential to work with a tax professional. They will come in handy in helping you avoid issues with the law. 


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Pat Raskob
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