Tax Law
Tax law sets how taxes are collected, reported, and enforced. It defines which income is taxable, what deductions are allowed, and the penalties for not paying taxes.
Why Are Taxes Necessary?
What is tax law? Taxes fund essential public services. Government programs, roads, schools, and national defense rely on taxpayer dollars. Without taxes, public services wouldn’t exist. The government collects taxes differently, and understanding tax law basics can help individuals and businesses comply with regulations.
Income taxes. Charged on salaries, investments, and business earnings.
Sales taxes. Applied when people buy products or services.
Estate taxes are applicable when significant amounts of money or assets are bequeathed.
Who Creates Tax Laws?
Tax laws are enforced at three levels of government:
Federal Government. The U.S. Congress sets national tax rules, and the Internal Revenue Service (IRS) enforces them.
State Governments. Each state has its law for tax, including income and sales.
Local Governments. Counties and cities collect property taxes and might add extra sales taxes in certain areas.
Common U.S. Tax Types
The tax law definition refers to the legal rules and regulations governing how taxes are collected and managed. In the U.S., taxes law vary based on income type, property ownership, and individual circumstances. The Internal Revenue Service (IRS) enforces federal tax regulations, while states and local governments have their own tax rules.
1. Income Tax
Most workers and businesses pay income tax based on earnings, including:
- Salaries, wages, and freelance income;
- Stock profits and rental property income;
The progressive federal income tax system means higher earners pay more significantly than lower earners.
2. Payroll Taxes
These fund Social Security and Medicare. Employers deduct payroll taxes from wages and match the contribution. Self-employed individuals pay both parts, known as self-employment tax.
3. Sales Tax
Sales tax is added when purchasing goods or services. The exact rate depends on the state and city. Often, essentials like groceries and medications are tax-exempt.
4. Property Tax
Property taxes are assessed on real estate depending on its location. They provide financial support for community services, roadways, and educational institutions. The evaluated worth of the property and structures typically determines the amount of tax.
5. Corporate Tax
Companies must pay taxes on their profits. However, LLCs and sole proprietorships avoid corporate taxes by passing income directly to the owner.
6. Estate and Gift Taxes
These taxes apply when transferring large sums of money or property. However, most people won’t worry about them unless they give away or inherit millions.
Key Principles of Taxation
Several fundamental principles influence the collection and application of taxes, ensuring that individuals and businesses contribute fairly according to their financial circumstances. From progressive taxation to deductions and credits, these principles define how the taxation law functions and impacts taxpayers.
Progressive Tax System
The U.S. tax system guarantees that higher-income people contribute a more significant percentage in taxes. For example:
Individuals earning $30,000 may face a tax rate of 12%.
An income of $500,000 could be subject to a 35% tax rate.
This system aims to keep taxation fair and proportional.
Voluntary Compliance
The law of taxes in the US relies on self-reporting. People must file their tax returns correctly. Mistakes or missed deadlines can lead to IRS audits or penalties.
Deductions and Credits
Taxpayers can legally reduce their tax bill with:
- Deductions. Lower taxable income (e.g., home loan interest, healthcare costs, and charitable contributions).
- Credits. Reduce the total debt directly (e.g., Child Tax Credit and educational tax credits).
Tax Compliance & Enforcement
The IRS enforces taxation laws by reviewing returns and performing audits when needed. Common tax mistakes that may trigger an IRS audit include:
Not filing taxes. Late filers may face fines.
Underpaying taxes. Taxpayers might have additional dues at the end of the year if insufficient amounts are deducted from their salaries.
Misreporting income. Failing to include freelance earnings or stock profits can trigger an IRS investigation.
IRS Audits
An audit checks precision by reviewing a tax return. Although specific audits are conducted randomly, a return is more prone to being flagged if it shows large deductions, considerable income variations, or other irregularities. The IRS might ask for bank statements, receipts, and additional documentation in an audit. Efficient record-keeping can simplify processes.
Note that this guide is not legal advice and is only meant to give you general information. Each state has its own healthcare rules, so if you need legal help, you should talk to a good lawyer in your area.