Taxes

The federal government collects taxes. In this section, you will learn about the different kinds of taxes.

Key Terms

ü deductions: things that can be subtracted from taxable income

ü Internal Revenue Service (IRS): the government agency that is in charge of collecting taxes

ü tax return: a person's annual report to the IRS that summarizes total income, taxes already taken out by the employer, and deductions

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The government is involved in the U.S. economy. For example, it makes laws that businesses must follow and laws that protect consumers and workers. In addition to making laws, the government also provides important public goods and services. To provide these goods and services, the government needs money. The government gets money through taxes like individual income taxes, corporate income taxes, and FICA taxes.

Individual and Corporate Income Taxes

About half of the money the federal government takes in comes from individual income taxes. Part of the money that people earn is collected by the government. The percentage each person pays depends on the amount of money he or she makes. The government takes a percentage of each person's annual earnings. For example, if a person makes $25,000 per year in taxable income, he or she is taxed at 15 percent. This means that the person pays $3,750 per year in income taxes to the federal government.

Most individual income tax is paid through a payroll withholding system. This means an employer automatically subtracts income taxes from a person's paycheck and sends it straight to the Internal Revenue Service (IRS). The IRS is the government agency that is in charge of collecting taxes.

Each year, every employee must fill out a tax return and send it to the IRS. A tax return is a person's annual report to the IRS. It summarizes total income, taxes already taken out by the employer, and deductions. Deductions are things that can be subtracted from your taxable income, like donations to charity, some medical expenses, and state and local tax payments. Sometimes, the amount of income tax that a person owes is different from the amount already paid. If you paid more than you were supposed to, you will get money back. If you did not pay enough, you must send the rest of the money owed to the IRS.

The chart below shows the different tax brackets for individuals. Like individuals, corporations must pay income taxes. Corporations have tax rates that vary just like the rates for individuals. The more money a corporation makes, the higher its tax rate will be.

FICA Taxes

Employers take money out of each employee's paycheck for another type of tax besides individual income tax. These taxes are authorized by the Federal Insurance Contributions Act, or FICA. FICA taxes provide money for two government programs: Social Security and Medicare.

Social Security is a program that was started to help people survive the Great Depression. It started as a fund to provide people with money to live on after they retired. Today, it also gives benefits to the surviving family members of wage earners who have died and to people who cannot work because of disabilities.

Medicare is a national health insurance program. It helps pay for health care for people 65 and older and people with certain disabilities.

There are many other taxes taken by the government. They include excise taxes, estate taxes, gift taxes, and import taxes. However, income taxes and FICA taxes are the two main taxes taken by the federal government.

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