Top Tax Questions Answered- Tax Basics | Vanguard (2024)

FAQs

What are two most important things to know about taxes? ›

Better to pay taxes now rather than later, when rates will be higher. If your tax rate will be lower in retirement, traditional, pretax contributions could be a smart choice. Put off paying taxes now, and pay taxes later when rates will be lower.

Income taxes are collected through withholding (or deducting) money from your paycheck. Employers deduct the money and send it to the government. People who are self-employed, such as entrepreneurs or ride-share drivers, also have to pay income taxes, but those taxes aren't withheld from their earnings.

4 common types of taxes

That includes income, state and federal unemployment and Federal Insurance Contributions Act (FICA) taxes. FICA is the biggest payroll tax and goes toward funding Social Security and Medicare.

Simply put, taxes are the sum of money paid to the government to collectively fund spending towards public goods and services. Taxes are used to fund things like schools, roads, and various public programs, such as Social Security and Medicare.

Taxes aren't determined by age, so you will never age out of paying taxes. Basically, if you're 65 or older, you have to file a tax return in 2022 if your gross income is $14,700 or higher. If you're married filing jointly and both 65 or older, that amount is $28,700.

There are no separate tax brackets for retirees, but when you retire you may end up in a higher or lower tax bracket depending on your retirement income. This will usually include Social Security payments along with pension or retirement account savings.

With a traditional individual retirement account (IRA) or 401(k) plan, you don't pay ordinary income taxes on the money you're contributing.

What are 5 things our tax dollars pay for? ›

Taxes also fund programs and services that benefit only certain citizens, such as health, welfare, and social services; job training; schools; and parks. Article 1 of the United States Constitution grants the U.S. government the power to establish and collect taxes.

A tax base is the total value of all assets, properties, individual income, and corporate income in a certain area or jurisdiction. To calculate the total tax liability, you must multiply the tax base by the tax rate: Tax Liability = Tax Base x Tax Rate2.

The General Rule is a method used to calculate the taxable portion of pension or annuity payments. Under this rule, the taxpayer divides their investment in the contract by the expected return. This is calculated based on the taxpayer's life expectancy.

Some of these sources include the Internal Revenue Code (IRC), Internal Revenue Service (IRS) publications, calling the IRS, consulting texts for tax professionals, hiring a tax professional, seeking volunteer tax assistance through VITA, and consulting texts for a consumer audience.

Taxes provide revenue for federal, local, and state governments to fund essential services--defense, highways, police, a justice system--that benefit all citizens, who could not provide such services very effectively for themselves.

Direct and indirect taxes

Taxes are most commonly classified as either direct or indirect, an example of the former type being the income tax and of the latter the sales tax.

Taxes are the primary source of revenue for most governments. Among other things, this money is spent to improve and maintain public infrastructure, including the roads we travel on, and fund public services, such as schools, emergency services, and welfare programs.