Taxes can be a tricky thing and can cause frustration for a lot of people. Luckily, there are software programs and professionals that can complete our taxes for us, but without a complete understanding of the tax system, a person does not know if they are paying too much to the government or not receiving enough back for their refund. Gaining a complete understanding of the basic tax components can help any individual get the most out of his/her taxes.
The price you pay for a good and/or service. Usually a set percentage for each category. For example, sales tax in Chicago is 1.25%, Illinois is 6.25%, and Cook County is 2.75%.
There are different tax rates depending on how much money you make and what type of household you have.
1. Gross Income:
All income for the year, which includes: wages, tips, profits, winnings, etc.
2. Adjusted Gross Income:
Adjusted Gross Income = Gross Income - Adjustments to Income
Adjustments are "pre-tax dollars" or amounts that do not count against your gross income and do not get taxed. You usually adjust for accounts that include saving for college and/or retirement funds
3. Taxable Income:
Taxable Income = Adjusted Gross Income - (Deduction + Exemptions)
Deductions: Reduced from income (not taxed). Examples include contributions to a charity or interest on a home mortgage.
Exemptions: Based on how many children you claim plus yourself and your filing status.
There are two ways to calculate: (you can only choose one, so pick the highest one to lower your taxes owed)
1. Itemized deductions: all deductions are added together.
2. Standard deduction: dependent on a person's filing status.
4. Total Tax:
Total tax = Taxable Income * the tax percent from the tax table below.
What a person owes for the entire year.
5. Payments/Withholdings:
- A way to pay your taxes as the year progresses.
- Results in a refund or payment at the end of the tax period.
