Taxes: Knowing the basics is key

Taxes 101: Prepare for Tax Day with year-end tax reduction techniquesUnderstanding how our tax system works can be tricky for anyone. Whether you’re an adult who pays little attention to the tax witholdings on your paycheck or a kid with your first job, the starting point to reducing your tax is knowing when to ask questions. But that means having a basic understanding of what might be taxed. Here are some “Taxes 101” pointers to help you or someone you know navigate the tax maze.

There are many types of taxes

When you think of taxes, the income tax usually comes to mind. This is a tax on personal and business income you earn from performing a job or providing a product or service. But there are also other types of taxes besides income taxes. Below are five of the most common.

  1. Payroll taxes: While income taxes can be used to pay for pretty much anything the government needs money for, payroll taxes are earmarked to pay for Social Security and Medicare benefits. This is 15.3% of most employees’ paychecks, but your employer pays half.
  2. Property taxes: These are taxes levied on property you own. The most common example is the property tax on a home or vacation property.
  3. Sales tax: These are taxes on goods and services you purchase. While most of this tax applies at the state and local levels, there are also federal sales taxes on items like gasoline.
  4. Capital gains taxes: You may owe capital gains taxes if you sell an investment or an asset for a profit. The most common example of this is when you sell stock for a gain. Capital gains taxes could also come into play with other assets. For example, selling your home or a rental property you sell for a profit.
  5. Estate taxes: This tax applies to assets in your estate after you pass away.

Not all income is subject to tax

Most, but not all, of your income is subject to tax.

  • While your paycheck is subject to taxes, interest earned from certain municipal bonds is not. And the government often excludes things like certain life insurance benefits.
  • Capital gains taxes have exclusions for gains on selling your home and donated stock.
  • Estate taxes have an exclusion, so only estates over this exclusion amount are taxed.
  • Many employee benefits such as health care, Health Savings Account contributions, commuting benefits, and small gifts from your employer are tax-free.

We know more than Taxes 101

The rules around these different types of taxes are complex. Having someone in your corner to help you navigate your tax obligation is essential in minimizing how much tax you must pay. It is also helpful for you to understand the basics so you know when to ask a question. As always, should you have any questions or concerns regarding your tax situation, please feel free to contact our RRBB advisors.


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