Taxes. I don’t know anyone who likes paying taxes – Any taxes. Federal taxes. Taxes on groceries. Taxes on clothes. Taxes when eating out. Just about everything gets taxed. We know it’s tax season and we all should be filing our taxes. Many of us look forward to a refund. A refund is essentially a free loan to the government that you could have seen in your paycheck every month. Ideally your refund should be 0 or close to it.
But why is this important? One of our focuses this year is sharing as we figure it out. This also calls for a deep dive into why we do what we do. So, Why do we pay taxes? What are they used for? Let’s take a look
Taxes help fund our local, state, and federal governments. The schools we attend, the roads we drive on, the employees who work for the government, the military, our hospitals and much more are run from the taxes we pay. Whether we like paying them or not taxes benefit all of us. About half of the money the federal government uses for its budget comes from the taxes that we pay.
Normally every time you get paid part of your paycheck is withheld and sent to the government. This is referred to as Income tax. If you take a look at your paychecks you’ll notice Federal, Social Security, Medicare and State Income taxes (note: Some states have no income tax). By law, any American whose gross income is over $10,000 (or $25,000 for married couples filing jointly) or who earned more than $400 from self-employment must file a federal income tax return.1
The money taken out of your paychecks is based on the number of withholdings you claim on your W-4. Prior to 2020 you had to claim a specific number of withholdings that would determine how much you would pay in taxes. You were to use the charts on the W-4 to help you figure out how much income tax you would pay. You’d fill out the form below either when you start a new job or when there are changes to your life such as marriage, kids, etc.
Many have found the form to be quite confusing when trying to figure out how many withholdings to select. The new 2020 W-4 is supposed to be much simpler. Mr. HutchLife and I went through it and found using the Tax Withholding Estimator on the IRS site helpful. It lets you know if you’ll owe taxes, get a refund, or the additional taxes you’ll need to pay when you file your taxes in 2021.
Every winter/spring between January and April we have to report our income to the IRS just as our employer reports our income to the IRS. The IRS then compares reported incomes and taxes withheld to determine if we paid the correct amount in taxes based on your income tax bracket (Next post on tax brackets and effective tax rates!!). If you haven’t paid (too little withheld) enough taxes then you owe the government, if you paid more taxes (too much withheld) then you will receive a check from the government – which is called a refund.
What we fail to realize is that the refund is really an interest free loan to the government that we could have had in our paychecks throughout the year. Who wants to give the government money for free? I know I don’t. I would rather owe nothing or a little to the government than receive a refund.
In our next post we’ll break down tax brackets and how the tax brackets affect the taxes we pay.
(https://www.history.com/news/why-we-pay-taxes)1(https://www.creditkarma.com/tax/i/tax-definition-why-we-pay-them/)2
