Understanding Income Taxes
Income taxes are defined as a tax levied by a government directly on income, especially an annual tax on personal income. These taxes are one of the many ways for the government to make money off of businesses and individuals. The amount that you pay in income taxes is dependent on where you live and/or operate your business, and how much money you make. However, no matter where you live, the more money that you take in, the higher your income tax will be.
The topic of income taxes can get complex quickly. There are several different types of income taxes, there are a variety of deductions you can be eligible for, and each state has slightly different rules. Let Ameris Bank explore this topic in more depth so you or your business can plan ahead.
In 1862, the U.S. government needed additional money to fund the Civil War, so it introduced the concept of taxes. Although this tax didn’t last long, it came to life again in the Revenue Act of 1913. This was also the year that Form 1040 started being used. Form 1040 is the form that is used to file your annual income tax return.
Internal Revenue Service (IRS) governs how our taxes and U.S. tax laws operate, and of course collects our taxes. There are other variables that go into our taxes as well, such as deductions, credits, commissions, and investments.
Individuals and businesses must calculate then file their taxes using an accountant, a tax service like TurboTax, H&R Block, and TaxAct, or do their taxes on their own. There are many calculators available online to estimate what may be owed as well.
There are three types of income tax: individual, business, and state & local.
Although this is a tax that is taken out of your income, there are ways to get around being taxed on every dollar that you make. Exemptions, credits and deductions will save individuals from being taxed more on the money that they are making. Some typical deductions for individuals include educational expenses, healthcare and select investments that you have made. You can also qualify for tax credits if you are in lower or middle-income households. These deductions were created to minimize the amount of money owed in taxes so that you can keep more of the money you work hard to earn.
While the idea of living in a no income tax state may be appealing, these states usually find a way to make up for not taxing on personal income. It can be important to verify state sales tax, based on where you may plan to live.
Ben Franklin is known to have said that “In this world, nothing is certain but death and taxes” and while that remains true, understanding how and why income tax exists and how you can save money is part of financial literacy. Learn more about managing your money by contacting Ameris Bank or visit one of our local branches.
Sources:
Ameris Bank does not endorse nor is affiliated with the companies listed in this article.
Information presented in the Financial Advice website is provided for educational purposes only and is not related to Ameris Bank's actual products or services. Ameris Bank makes no representations as to the accuracy, completeness or specific suitability of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Ameris Bank recommends you consult a professional for any specific guidance you are seeking.
The topic of income taxes can get complex quickly. There are several different types of income taxes, there are a variety of deductions you can be eligible for, and each state has slightly different rules. Let Ameris Bank explore this topic in more depth so you or your business can plan ahead.
A quick glimpse into the past…
In 1862, the U.S. government needed additional money to fund the Civil War, so it introduced the concept of taxes. Although this tax didn’t last long, it came to life again in the Revenue Act of 1913. This was also the year that Form 1040 started being used. Form 1040 is the form that is used to file your annual income tax return.
How do income taxes work?
Internal Revenue Service (IRS) governs how our taxes and U.S. tax laws operate, and of course collects our taxes. There are other variables that go into our taxes as well, such as deductions, credits, commissions, and investments. Individuals and businesses must calculate then file their taxes using an accountant, a tax service like TurboTax, H&R Block, and TaxAct, or do their taxes on their own. There are many calculators available online to estimate what may be owed as well.
What are the different types of income tax?
There are three types of income tax: individual, business, and state & local.
Individual Income Taxes
This type of income tax is also known as “personal income tax”. These are the taxes that come out of your wage, salary or any other type of income. Typically, this tax is imposed by the state you live in.Although this is a tax that is taken out of your income, there are ways to get around being taxed on every dollar that you make. Exemptions, credits and deductions will save individuals from being taxed more on the money that they are making. Some typical deductions for individuals include educational expenses, healthcare and select investments that you have made. You can also qualify for tax credits if you are in lower or middle-income households. These deductions were created to minimize the amount of money owed in taxes so that you can keep more of the money you work hard to earn.
Business Income Taxes
Business income taxes are what companies pay on their earnings. The types of businesses that the IRS imposes these taxes on are corporations, small businesses, contractors, and partnerships. Usually, the business will calculate its income and then subtract any business expenses that they may have had. These expenses can include operating expenses and capital expenses (e.g. an office building or company cars).State & Local Income Taxes
State and local income taxes are exactly that - taxes that are imposed by your state and local area. Most states, including Alabama, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and others levy individual income taxes while Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming do not.While the idea of living in a no income tax state may be appealing, these states usually find a way to make up for not taxing on personal income. It can be important to verify state sales tax, based on where you may plan to live.
End of the Year Tax Tips & Tricks
- Defer your income: If you are someone that typically receives a year-end bonus, or can choose when they receive their paycheck, it may be smart to defer it to the following year. Of course, this won’t keep you from paying taxes on this income entirely, but it will buy you another year.
- Keep track of your donations: Make sure to save proof of the amounts of any donations you make throughout the year. This will allow you to deduct the correct amount from your taxes.
- Contribute more to your retirement accounts: If you have a retirement account like a 401K or IRA that is tax-deferred, it may be smart for you to contribute some more of your paycheck so that you can avoid being taxed on it. This money will also grow greatly over time, making it a great tax benefit and retirement benefit.
- Check your flexible spending account balance: Some companies offer their employees flexible spending accounts (FSAs). The money that goes into these accounts is not taxed by income taxes or Social Security taxes. It is important to check the balance on your account because it does not roll over year after year. You don’t want to lose out on your untaxed money.
- Make the most of your refund: If you do get money back at year end, make the most of your tax refund by paying down debt, investing, or put it towards high interest savings like a money market or CD.
Ben Franklin is known to have said that “In this world, nothing is certain but death and taxes” and while that remains true, understanding how and why income tax exists and how you can save money is part of financial literacy. Learn more about managing your money by contacting Ameris Bank or visit one of our local branches.
Sources:
- https://www.investopedia.com/terms/r/revenue-tax-act-1862.asp
- https://www.brookings.edu/articles/we-tax-dead-people/
Ameris Bank does not endorse nor is affiliated with the companies listed in this article.
Information presented in the Financial Advice website is provided for educational purposes only and is not related to Ameris Bank's actual products or services. Ameris Bank makes no representations as to the accuracy, completeness or specific suitability of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Ameris Bank recommends you consult a professional for any specific guidance you are seeking.