Tax 101: All You Need to Know

Tax involves the government obligating individuals or entities to remit a portion of their generated income. The specific percentage of income that is subject to taxation varies. The tax is based on factors such as income level, tax brackets, and applicable tax laws. Calculations based on established tax rates determine this portion of income, commonly referred to as tax liability.

The funds collected through taxation play a fundamental role in financing a wide array of government initiatives and public goods. This includes infrastructure, education, healthcare, social welfare, defense, and other services vital to society.

Tax serves as a critical mechanism for governments to generate revenue and fulfill their responsibilities in providing services and goods. It is a means by which societies distribute the financial burden of governance among individuals and businesses. This allows for the equal allocation of resources to meet the needs of the population as a whole.

Types of Taxes 

Income Tax

It is the portion of an individual’s or entity’s earnings that is required to be surrendered to the state or federal government. This is their percentage of the generated income. Income tax entails the obligation for individuals and businesses to contribute a predetermined percentage of their earnings to the government. The percentage of income paid as tax supports public services, government operations, and various programs based on applicable laws.

Income tax funds the government, enabling essential services and public goods provision as a vital revenue source. These may include infrastructure development, education, healthcare, defense, social welfare programs, and other initiatives that contribute to the overall functioning of society.

Corporate Tax

It refers to the financial obligation imposed by the government on businesses. A certain percentage of their profits is levied as a form of taxation. Corporate tax revenue funds federal programs, economic growth, public services, and infrastructure development for governmental initiatives. Corporations contribute earnings to support essential programs benefiting society through government resources. The jurisdiction and prevailing laws determine the exact rate at which corporate tax is imposed.

Corporations fulfill fiscal responsibilities by contributing profits to support the advancement of the public sector and economy.

Sales Tax

The imposition of sales tax on specific goods and services varies depending on the jurisdiction in which it is applied. At the point of sale, sales tax is typically added to the final price of a product or service, making The primary purpose of sales tax is for the government to generate revenue, which can then be utilized to fund various public services. The application and rates of sales tax differ from one jurisdiction to another. In certain regions, the sales tax may be uniformly applied as a flat percentage to all eligible goods and services.

In other cases, it  may be tiered, with different rates being imposed on different types of products or services. Sales tax varies for different goods and services, with exemptions or reduced rates for essential items.

Sales tax plays a crucial role in the overall taxation system of a country or region. Taxes on goods and services generate significant government revenue from public consumption. The government utilizes this revenue to fund public services like infrastructure, healthcare, education, public safety, and societal development.

Property Tax

It is determined based on the assessed value of land and property owned by individuals, businesses, or other entities. Local governments impose property tax for public services and infrastructure within their jurisdiction.

Property value assessment for tax purposes involves evaluating land, structures, and improvements based on market worth. Local tax authorities or assessors periodically conduct assessments, considering factors like location, size, condition, and other relevant considerations.

The determined value then serves as the basis for calculating the property tax liability.

Estate Tax

This refers to a tax imposed on the total value of a person’s estate at the time of their death. The tax is calculated by determining the fair market value of the property and assets included in the individual’s estate. Estate taxes are levied by both state and federal governments and are applicable when the total value of the estate exceeds certain predetermined thresholds or exemptions.

The primary purpose of the estate tax is to generate revenue for the government and promote a fair distribution of wealth. By taxing the estates of individuals with substantial assets, estate tax aims to mitigate wealth concentration and provide funds for various public programs and initiatives.

The calculation of estate tax involves assessing the fair market value of the assets included in the estate, such as real estate, investments, business interests, cash, and personal belongings. To reduce the tax, deductions, and exemptions are applied, including allowances for contributions, debts, funerals, and transfers to surviving spouses. These deductions and exemptions are actively considered during the calculation process.

Deductions and exemptions may be applied to reduce the taxable value, such as allowances for charitable contributions, debts, funeral expenses, and transfers to surviving spouses. The remaining taxable value is then subject to the applicable estate tax rates.

Estate planning and legal strategies can be actively employed to minimize estate tax liability, which is worth noting. Individuals can employ tools such as trusts, gifts, and charitable donations to manage their assets and reduce the taxable value of their estate, while still providing for their beneficiaries and philanthropic interests. Estate tax regulations and thresholds may be subject to change over time due to legislative updates or amendments.

Tariffs

These are taxes that a country imposes on imported goods. Its primary objective is to protect and strengthen domestic businesses and industries. The government imposes these taxes on imported products, applying them based on the classification and value of the respective items.

The imposition of tariffs serves multiple purposes. One of the key aims is to safeguard domestic industries from foreign competition by making imported goods relatively more expensive compared to locally produced alternatives. By imposing tariffs, governments seek to create a level playing field and prevent unfair competition that could potentially harm domestic businesses. Tariffs can act as a protective measure, allowing local industries to grow, innovate, and remain competitive in the global market.

Tariffs are commonly determined by classifying goods according to internationally recognized tariff schedules. These schedules classify products into different categories and assign corresponding tariff rates. Tariff rates can be specific (based on the quantity or weight of the imported goods) or ad valorem (based on a percentage of the goods’ value). Governments may also impose additional fees or surcharges on top of the basic tariff rate.

The revenue generated from tariffs can provide a source of income for the government. Various purposes can be funded using the revenue generated from tariffs. They include funding public programs, infrastructure development, or compensating domestic industries adversely affected by international competition. Additionally, tariffs can serve as a tool to regulate trade flows and balance trade deficits by influencing the demand for imported goods. The use of tariffs is subject to international trade agreements and regulations. Countries often negotiate trade deals to establish tariff rates, reduce barriers, and promote fair trade practices. These agreements aim to strike a balance between protecting domestic industries and fostering global economic cooperation.

Tax Scams to Avoid

Tax refund scams are rapidly emerging as a prevalent method employed by thieves to unlawfully acquire your funds and potentially compromise your identity. Exploiting individuals’ anxiety surrounding tax payments or interactions with the Internal Revenue Service (IRS), criminals engage in deceptive practices to obtain sensitive details and submit deceitful tax returns. Unfortunately, this issue is progressively exacerbating. Tax scams involve the perpetration of financial fraud, wherein individuals posing as IRS agents or other government representatives attempt to deceive victims into providing personal information or granting access to their tax refunds. The profitability of these scams stems from the fact that many people lack experience in dealing with the IRS. Once scammers acquire the victim’s information, it paves the way for further fraudulent activities, including identity.

Phishing emails asking you to verify your personal information

Phishing emails are fraudulent emails posing as the IRS, often using urgent or threatening subject lines, to steal your personal information. These emails may lead you to a fake IRS website where any information you provide, such as Social Security or credit card numbers, goes directly to the scammer. Additionally, clicking on phishing links can result in malware installation, allowing scammers to access your information or compromise your email without detection.

How to avoid it: Before clicking on any link in an email, always verify the “From” name. Scammers often disguise their names to mimic IRS or other official agencies, but hovering over or clicking on the name can reveal their true email address. If the email does not originate from a .gov address, it is likely a scam. For enhanced security, consider using a VPN with Antivirus software to safeguard your devices and home network against viruses and malware.

Phone Scams

Scammers employ bots and robocalls to make numerous simultaneous calls, posing as the IRS. When answered, they claim that you owe taxes and demand immediate payment. They may threaten arrest if you refuse to pay and might even attempt to deceive you into sharing information to steal your Child’s Tax Credit. However, it’s important to remember that any money or information you provide goes to the scammer, not the IRS.

How to avoid it: To avoid falling for phone scams, remember that caller ID can be deceptive, even showing the official IRS phone number. Don’t trust it blindly. Scammers may provide a fake badge number or even possess your stolen Social Security Number (SSN). If you receive a call from someone claiming to be from the IRS, ask for a reference number and promptly end the call. Then, independently verify by dialing one of the official IRS phone numbers to ensure the legitimacy of the call.

Threats

Scammers employ aggressive tactics, making threats to manipulate victims into sharing desired information. Fraudulent individuals commonly assert that they are revoking or suspending your Social Security Number due to tax-related matters.

How to avoid it: Ignore and disregard the scam. The Social Security Administration cannot suspend, cancel, freeze, or revoke your Social Security number. Simply hang up, delete the email, and move on.

Tax Preparers

Beware of scammers who impersonate tax preparers and falsely claim to file your taxes. These fraudsters may exploit invalid exceptions, introduce errors to your tax return, or potentially submit a fraudulent return using your identity. Stay cautious and vigilant against such scams.

How to avoid it:  Ensure that you exclusively share personal or tax information with a verified preparer whom you have deliberately selected. Legitimate tax preparers possess an IRS Preparer Tax Identification Number (PTIN), which you can request from them. Additionally, you can verify their credibility by searching for them in the official IRS directory.

Tax Reps 

Scammers frequently pose as representatives from legitimate or non-existent tax agencies during phone calls. They may claim to be from organizations such as the Taxpayer Advocate Service or the Bureau of Tax Enforcement. It’s important to note that while the Taxpayer Advocate Service is a genuine entity, they do not typically initiate unsolicited calls to taxpayers. On the other hand, the Bureau of Tax Enforcement is a fictitious organization and does not exist in reality. 

How to avoid it: Be cautious of unsolicited calls from individuals purporting to be government agency representatives. Request a reference number, terminate the call, and contact the official phone number independently to ensure authenticity.

To verify any potential tax debt with the IRS, reach out to them directly at no cost. If you do owe back taxes, you have the option to collaborate directly with the IRS. You can either make a payment or arrange for an installment plan to gradually repay the amount owed.

During tax season, it’s crucial to remain vigilant to detect IRS imposters and safeguard your money and sensitive information. To enhance your protection and minimize the risk of identity theft, file your taxes promptly. The earlier you file, the less opportunity fraudsters have to impersonate you. If you enlist the services of a tax preparer, conduct thorough vetting and be cautious of individuals who promise substantial refunds without reviewing your information first.