Taxes 101

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Nobody forgets the first time, whether it was at their high school job at the ice cream parlor or their first job out of college, that they eagerly tore open a paycheck, already planning a shopping spree . . . only to find that someone had stolen a huge chunk of their money! (If you haven’t felt this sinking feeling yet, prepare yourself.)

Yup, that big missing chunk went to taxes. But don’t think you’re not getting anything for it! Here are a few examples of what your taxes get you: the clean water running out of your tap, the police keeping your neighborhood safe, and the garbage that gets picked up on your curbside.

You probably have an opinion on whether you’re over or underpaying the government, but that’s a topic for another time. Following is an explanation of the ins and outs of taxes so you can fully understand how they affect your finances.

Taxes in a Nutshell

Taxes are compulsory contributions to the state you live in, and to the federal government, levied by the government to pay for things that society as a whole needs but people can’t pay for individually. That includes everything from the roads you drive on to law enforcement to the salary of the President of the United States.

These taxes aren’t optional, and trying to hide or outrun them never really ends well. (Just Google “celebrity tax evasion.”) Plus, 96% of Americans believe it’s your civic duty to pay taxes, so the best thing to do is get a basic understanding of taxes so that you can pay them accurately and on time, with minimum stress and pain — financial or emotional.

Why Understanding Taxes Is Important

Understanding taxes will save you when filing. Collectively, Americans overpay the government by $945 million every year. That’s about $400 per household. If you understand how taxes work, you can avoid giving too much to Uncle Sam.

Understanding taxes will also save you at work. At your job, understanding how taxes work can help you save hundreds on transportation costs or childcare by having your costs of getting to work or having your children take care of taken out of your paycheck pre-tax. But more on that follows.

Understanding taxes will also help you budget better. You’ll be able to more accurately plan your monthly and yearly spending if you understand how much you’ll be paying. No one likes financial surprises (unless it’s a giant windfall).

Read the rest of the article on LearnVest.com.

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