If you are an adult, you would have surely heard about taxes. In a nutshell, taxes are the fees the government charges its citizens for doing their job and maintaining the country's public infrastructure. Taxes are levied on everything from the goods you purchase to the real estate you buy and sell and the income you earn. In fact, according to a survey, American citizens spend almost 30% of their income on paying a variety of taxes at the federal, state, and local levels. Irrespective of whether you are self-employed or an owner of a business, you will be required to pay taxes to the government. Because tax laws are complicated, they can confuse you as well as your accountant. In such instances, you may end up in trouble for falling short or failing to pay the dues to the Internal Revenue Service (IRS). Therefore, it is in your best interest to consult a tax attorney when filing taxes or to deal with the IRS.
Technically, tax is defined as involuntary fees levied on corporations or individuals enforced and collected by government entities – whether federal, state, or local. The fees collected by the government are used to finance the building and maintenance of the public infrastructure of the company. Taxes are of two types:
Tax laws and regulations are legal procedures that dictate how federal, state, and local governments calculate the taxes you owe them. These laws explicitly govern how taxes on varying goods, products, services, sales, etc., are calculated. A majority of these laws are drafted and enforced by the US Congress and state legislators.
The Internal Revenue Code – Title 26 of the US Code forms the basis of the federal tax laws across the country. Its 11 different subtitles cover and dictate how different types of taxes are calculated and collected. The code also regulates the administrative and procedural rules that the citizens of the United States and the Internal Revenue Service (IRS) need to follow.
In addition to the IRC, the regulations issued by the Department of Treasury form the universal set of federal tax laws implemented in the United States. The Department of Treasury issues detailed regulations explaining each code mentioned under the IRC with examples. The IRS must acknowledge and enforce the tax laws following these regulations.
Like federal tax codes, the states have an independent set of legal procedures used to determine the taxes to be collected. While not every state collects income taxes from individuals, all states have tax codes for calculating and collecting taxes on real estate, sales, etc. These tax codes serve the same purpose as the IRC on the state level. Moreover, tax codes can be created at county and city levels as well.
The taxes collected in the US can be broadly classified into three basic categories:
The category can be further divided into the following categories:
Besides the federal government, as many as 43 states and numerous local and city municipalities collect income taxes from individuals and businesses. The percentage of taxes levied on income is progressive, meaning the higher the income, the higher the tax rates. The taxable income is divided into two categories:
The earned taxable income category includes:
Income tax is also levied on other sources of income that are not connected to the work you do. These include
Both state and federal laws have provisions that allow you to trim your taxes by applying and availing deductions and allowances.
The US federal laws mandates employers to deduct a part of their employees’ income in each pay cycle and then submit the amount to the government. These deductions are payroll taxes or FICA taxes as they are authorized under the Federal Insurance Contribution Act. The proceeds generated from these taxes are funneled into the Social Security and Medicare systems. Self-employed people residing in the United States are also liable for paying these taxes.
As stated above, the money you receive from the sale of assets is taxable. This is known as capital gains tax. Sales proceeds received from the sale of assets such as stocks, bonds, and real estate are subject to capital gains taxes.
Estate taxes are imposed during the transfer of the ownership of a property upon the owner's death. The taxes were created to prevent the prolonged accumulation of tax-free wealth within the affluent families in the country. While estate taxes are levied on the federal level, states collect an inheritance tax based on the same lines.
Also known as ad valorem tax, these taxes are levied on the current value of the real estate you own. The city or local council collects the tax. These taxes fluctuate based on the location, condition, and market value of the property in question. In addition to real estate, some states levy taxes on personal items such as automobiles, boats, airplanes, and other recreational vehicles. Some states also have different tax codes for charging business properties such as wharves, factories, etc.
Sales taxes are a common revenue-generating methodology used by states and local authorities. The price of the goods and services you pay includes a percentage that goes to the authorities. The tax brackets are decided on the local level and are different for different products and commodities.
Both federal and state authorities levy these taxes. Excise taxes are calculated based on the quantity of the item bought by a customer and not its value.
These taxes are levied on various services that include air travel tickets, toll, rental cars, licenses, utilities, hotel rooms, and other financial transactions.
Hiring a tax attorney will benefit you in the following ways:
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