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  • Writer's pictureViolet Maile

Understanding and Paying Taxes

From a very early age, taxes are somewhere on our radar. You’ve heard Benjamin Franklin’s old joke about the only two certainties in life, “Death and taxes.” Even at nine years old, you’re taxed in restaurants and games of Monopoly. But when your parents finally sit you down to have those big talks growing up, none of those talks are about how to pay your taxes, or even understanding taxes in the first place.

What Are Taxes?

In the simplest terms, taxes are when the government “passes the hat” and everyone throws in a few bucks. This happens in a few different ways and we’ll explain how taxes are paid later on. But when it comes to understanding taxes, the ultimate goal is to raise a community fund that pays for all the essentials. And as it turns out, communities have a ton of essentials. So, that fund needs to be extremely large. Everyone needs to chip in quite a bit of money, and how that money is spent shapes our entire society. So, needless to say, taxes can be a pretty emotionally charged topic. In fact, sometimes people feel so strongly about taxes that they’ve actually fought wars over it, as The British Colonies did when they fought The Revolutionary War and formed The United States of America. But regardless of which country you’re in, taxes, and the people who pay them, keep our communities running. So, knowing how to pay your taxes, and understanding taxes, are both huge parts of maintaining our collective lifestyle. The former Supreme Court Justice Oliver Wendell Holmes once said, “Taxes are the price we pay for a civilized society.” So, let’s take a huge leap towards understanding taxes by getting a sense for what they actually fund.

Taxes Fund Our Community Services

Taxes don’t usually generate a ton of enthusiasm, but maybe understanding taxes can help with that. Because they’re an incredible example of teamwork and generally considered to be in everyone’s best interest. For example, the earliest fire departments were privatized, which was a total nightmare. If your house was burning down, hopefully a private firm would show up with a bunch of water, so you could agree on a “fair” price while your house was burning to the ground. But when everyone knows how to pay their taxes, and most importantly, does, you solve all that.

Taxes pay for our community’s fire department, police department, and post office. Pooling your funds leads to a ton of value you couldn’t unlock at the individual level. Imagine if aliens attacked Charlotte, North Carolina. You could either call Will Smith’s character from “Independence Day,” or learn how to pay your taxes and help fund our standing military.

Taxes Pay for Infrastructure

Now, think of all the infrastructure that makes your life “go.” Taxes pay for all of that, too. The highway system and paved roads are a prime example. You might not love driving up to a bunch of road construction, but it’s the entire reason we don’t have to take The Oregon Trail to work every morning. Then you have tunnels. Not only are they great for carving shortcuts through the mountains, but they’re the perfect way to “accidentally” drop those unwanted phone calls. Taxes also pay for our sewer systems, which certainly beat the “bucket method” from The Middle Ages.

They even fund our bridges so you don’t have to float your wagon across a river. Sure, taxes aren’t a ton of fun when you notice your paycheck is a little light. But understanding taxes helps that all go down a little smoother. When you see the clean water flow out of your faucet, taxes don’t feel like a burden anymore. They feel more like magic.

Direct Taxes Think of direct taxes as whenever you pay the government directly. The first example that probably comes to mind is when you pay your personal income taxes. A portion of whatever you make generally goes towards the federal, state, and local tax base. Corporations pay these too, and likewise, pay them directly to the government. Depending on the state you reside in and your individual circumstances, you may also pay taxes on miscellaneous sources of income, like when you profit off of investments. Notably, this category also refers to property taxes, which both individuals and corporations are usually subject to. So, when you’re wondering how to pay your taxes, you’re usually thinking of direct taxes. Because as you’ll see below, someone else generally takes care of all those indirect taxes for you.

Indirect Taxes

Let’s say you go into a 7/11 and buy a Gatorade. You will generally pay a small tax on it, which is added right there and then. The same goes for many types of purchases – such as buying a car or eating out at a restaurant. But here’s what makes them indirect taxes: where these taxes are applicable, you pay them to the merchant and then they pay the government for you. In other words, they’re collecting these taxes on the government’s behalf. Another way to think of indirect taxes is whenever you’re paying taxes on a transaction. So, this obviously applies to taxes on goods and services, like you’ve seen above.

How to Pay Your Taxes

Telling the Government How Much You Owe Step one is really just figuring out how much money you owe and communicating that to the government. Before you dive in, you have to ask yourself a very easy, but very important question: Can I figure this out myself? In some cases, your taxes may be fairly easy to file on your own and certain online programs may be able to help walk you through everything. However, we generally advise consulting with a qualified tax advisor before filing your taxes to make sure you’ve covered all of the bases in your individual situation. Sure, it’ll cost you, but think about how much your time is worth. Now, think about the fact that accountants might know about a lot of deductions that you weren’t even aware of. When you think about it like that, an accountant can quickly pay for themselves. You can always give your taxes a go with the free software, and if it feels like you’re out of your comfort zone, hire some help. But once you figure out how much you owe, you communicate that to the government through a process called “filing your taxes.” The IRS allows you to do this through the “IRS Free File” feature on their website. Make sure you file your state taxes as well, if applicable, along with any others that apply. The taxes you need to file are informed by the specifics of your life. For example, in some cities, if you have a company, you’ll owe a city business tax. So, once you sort all of that out and file everything, all that’s left to do is pay up.

Getting Your Tax Money Where It Needs to Be For indirect taxes, the merchant is typically paying these. So, when it comes to how to pay your taxes, you’re mostly concerned with direct taxes. Usually the most simple form of paying up is when you mail both a check and something called a “voucher” to whichever government entity you’re paying. The voucher is just a form that says how much you owe, and when the government processes the corresponding check, you’re all set. There’s also an electronic version of the same experience, where you get to settle up without actually sending them a piece of physical mail.

Sometimes you don’t even owe anything. If you’re a salaried employee, oftentimes your check is run through a payroll company. Sometimes you make withholdings, where you basically ask the payroll company to pay some of your taxes in advance. That’s when you might end up with a refund. You still file your taxes, but if you overpaid, the government actually sends you a check.

  1. Do you know everything your taxes are paying for?

  2. Are you missing out on taking advantage of any deductions?

If you need help for the next year. Well, help has arrived.

Yours waiting,

Paavan Kotini

Kotini & Kotini

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