tax

Let's Talk About Tax

In modern day, money is used to pay our taxes, and the system remains full of obscure and complicated language to many.  Here is a little tax talk to help you better understand the words in front of where your money goes. 

 

-What is "tax"?

A tax is defined as a financial charge or other levy imposed by a larger entity such as the state upon an individual or legal entity, and failure to pay is punishable by law.  There are many different kinds of taxes, but what they share in common is that your money goes on to support an aspect of the government.  Taxes are a non-voluntary transfer of resources from the private to the public sector.  When someone fails to completely pay their taxes a number of penalties can be imposed, ranging from fines and forfeiture to incarceration.

 

-What do taxes do?

The purpose of tax is to bring revenue into the government so that it may operate its many major and minor functions.  These range from roads and creation of legal tender, to the funding of welfare and public services.  Some of your state taxes go towards paying off any debt that the state you live in accrued as well as the management of public utilities such as water treatment and gas lines. 

 

Historically the nobility were supported by taxes on the poor, but today systems like social security are created to help the poor, disabled, or retired elderly by those that still produce income.  Governments can even use taxes to change the way we feel about buying certain goods or taking certain jobs by making them appear less attractive to our spending habits (think about the ever rising taxes on tobacco products).

 

-What are some kinds of taxes I may encounter?

Income Tax

Income tax is a payment imposed on the net gains an individual or business makes.  There are many little deductions you can make to your taxible income that lessens the amount of taxes you're responsible for, such as making charitable donations or paying into an IRA.  The income tax we pay as individuals is collected from each pay check, called "pay-as-you-earn", and at the end of the fiscal year any corrections that need to be made are done in one of two ways: payments to the government (when you "owe"), and in government payments to you ("refunds"). 

 

Capital Gains Tax

If you have earned any supplimental income as a result of of the sale of capital assests (such as lumber or oil), then in many cases you will be taxed a portion of that income. Capital assets can include personal assets, such as antique cars or precious jewelry. 

 

Corporate Tax

Corporate tax is like an income tax on corporations.  The rates and bases for these may be different than those for other taxable persons. 

 

Social Security Contributions

Employers and employees make compulsory payments into social security to provide publically funded retirement and healthcare systems for the elderly and underprivileged.  The rate of this tax is generally fixed.

 

Taxes on Payroll

Taxes can be imposed on employers for unemployment based on their total payroll.

 

Taxes on Property

Property can be considered to be immovable (such as real estate and housing) or some classes of movable property (such as wealth).  Taxes on property are recurrent taxes that are paid time after time (usually yearly) based on the property you own and the government you own it in. 

 

Inheritance Tax

There are several taxes which arise upon the death of an individual.  One of which is an estate tax, which is paid by the personal representatives of the deceased, and another is an inheritance tax, which is paid by the beneficiaries of the estate.

 

Transfer Tax

This is a tax charged by the state or government in regards to the transfer of property from one individual/entity to another, and can be tied to the recording of the deed or other transfer documents.

 

Sales Taxes 

When a product is sold to the final person who will use it, a tax is added.  Some things that are commonly exempt from sales tax are food and utilities, due to people in lower income brackets having to spend a higher proportion of their income on the fixed-rate sales tax.  Some states that do not impose an income tax make nearly their entire income on sales tax (examples are Alaska and Tennessee).

 

Excises

Excises are a unique type of tax that is a "price-per-unit" tax not based on the value of the product being taxed (such as being taxed so many cents per gallon of gas).  Excises can be used to modify buying of certain goods in relation to others, by taxing them more heavilly per unit.

 

License Fees

These are considered to be occupational taxes levied on businesses or individuals who are engaged in certain types of businesses.

 

-What kind of "tax talk" am I likely to see?

"Ad valorem"- a tax based on how much something is worth, such as inheritance tax.

 

"Consumption tax"-any tax on non-investment spending, such as sales tax.

 

"Environment tax"-is a tax that is attempting to reduce environment impact by changing the price ratio of things, such as carbon tax for non-renewable fuels such as natural gas.

 

"Proportional", "progressive", "regressive" and "lump-sum"-these words all refer to the percentage of tax you pay related to how much money you make.  A progressive tax is a tax imposed so that the tax rises in equal amounts to the rising value of what the tax is applied to.  The opposite of which is a regressive tax, where the tax rate decreases in relation to the amount to which the rate is applied.  In between the two is a proportional tax, where the rate is fixed while the amount which it is applied to increases.  A lump-sum is a tax that is a fixed amount whether or not there is a change in the financial circumstances of the taxed entity.

 

"Direct" and "indirect"-these are ways to refer to how taxes are adjusted to you, the taxpayer.  An example of a tax that is a direct tax is the income tax, which is calculated directly from your personal earnings, where as an example of an indirect tax is a sales tax that is constant no matter what you're buying/what your income is.

 

"Fees"- these are payments which the government collects in exchange for particular services or use of property.  Some examples of these are tolls paid to use roads, bridges and tunnels and fees charged for the use of government parks.

 

-What are some effects taxes have on my life?

Besides paying for roads to be rebuilt and law enforcement to keep the streets free of crime, taxes effect our lives in many more subtle ways.  Taxes often have a tendency to effect those that are a step beneath those that pay them--for example, a tax on employers will in actuality be effecting the employees in the long run.  Taxes can be harder on buyers or sellers of certain products, depending on what the demand for those products is like.  We can give help you with the tax and you will tax relief all lifelong.

 

Taxes are important---they help keep inflation low by allowing the government to spend without inflation.  They benefit society by providing funding for the old and underprivileged, and are used to reduce economic inequality in our society.  Adam Smith said it best in 1776 with "Every tax, however, is to the person who pays it, a badge; not of slavery, but of liberty."

 

If you've fallen behind on your tax payments and need a little help getting back on track, contact us at Optima Tax Relief.  We're comprised of professionals with over 25 years of experience and are waiting to take the burden of stress off your shoulders--putting your mind at ease.