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What are Taxes?

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Comedian Lewis Black did a skit on the importance of taxes, on a stand up special a few years ago. And although it’s amusing watching him freak out in his political satirist atmosphere; he makes a valid point. Of all the math we’re taught over the years, some of it so specialized it has no actual application in our everyday life, then “Why hasn’t anyone taught taxes in a math class?”. Taxes are an integrated part of adulthood, and whenever you look at potential income to be earned, that little phrase comes into mind: Gross income vs. Net income. This comes about while planning out your finances, monthly budgets, and yearly projected income, savings, and investment options. All of these variables are important to look at, understand, and plan for when moving forward with safe financial planning.

What Are Taxes?

Seemingly an easy question. Taxes are a collection of finances taken from your income, as well as everyone with a paycheck that goes into the funding of common interests; whether that be at the municipal, state, or federal level of government. Essentially, you make a dollar amount and a percentage of that dollar amount goes back into the community pot to fund things and services desired by the community for education, self improvement, and safety and security. Your tax percentage is based on the amount of money you make hourly or monthly, or yearly, and depending upon that tax bracket is the amount of money per year you are required to pay. Now, most of us already know this, and the bulk of us would agree that we simply do not pay taxes, because whenever pay day is, usually the taxes have already been deducted from your pay stub.

Gross vs. Net income

Gross income is the amount of money you have made before taxes and net income is the amount of money you made in a year after taxes are subtracted. Easy enough right? When it comes to financial planning we often base our living expenses on that we make, what our yearly worth is worth: our total gross income. But the bulk of us have to pay taxes. If the government is successful at anything, it is collecting taxes on any amount of income that you report. Say you are looking to buy a car worth $25k, and last year you made $30k net income, but made $38k in gross income. On the application either leasing or buying, you’re going to write down that last year you made $38,000.00 because that will give you the best buying power next to your credit score.

Income Tax

taxesHave you ever tried to do your income taxes on your own? It’s like reading another language that has only commands and makes no sense. This is really where Lewis Black’s comic frustration takes on a relatable sense of humor. But the idea stated above remains. If we are socially obligated to pay taxes and according to Lewis Black, “…taxes are math, why hasn’t anyone, in the history of math classes, taught taxes in a math class?” ¬†Because while we try to plan out our financial future while budgeting our monthly spending, we find that either we are paying the government too much. Or perhaps, regrettably they want more from us and claim we haven’t paid enough. While there is no federal law stating that you have to file an income tax return; should you get audited and owe money, the true relentless force of the government will come into full effect until you’ve paid off your debt. Those of us who do not have all the disposable income to throw away find ourselves every tax season filling out income tax forms to try and get any amount of money we can back from the government, so that we can get a mini tax free bonus that’ll make us feel better about our finances, or sometimes, lack thereof.

Taxes are an integrated part of our everyday life. We have to pay taxes and therefore on some level, we should understand why we are taxed, and where they are going. Perhaps the idea of financial and retirement planning that we often seek advice and guidance from financial planners, advice columns, and those around us, should in fact be taught in school to help prepare us for the actual challenges in our adult life, you know instead of the required trigonometry and whether an  obtuse triangle has a mass of whatever. Safe financial planning comes from understanding the amount of money you are making, the amount you will owe to the government, and the understanding of the variables on income that you can trust as secure numbers where your retirement money and investment options can lead you in the future. It is only through this knowledge that the role of taxes can have a positive outlook on everything you do in your present financial decisions.

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