Tax law is the complex body of law that governs how taxes are imposed by the government onto citizens and non-citizens. A tax is defined as a tariff on economic transactions by individuals and corporations. This tariff can be imposed at the federal level, by states, or even by local communities, and is used to fund the government and allow for the provision of government services such as schools and parks. At the federal level, taxes are codified in the Internal Revenue Code, which is updated regularly. Although income taxes are the most widely recognized form of taxes imposed by the government, other common taxes include property taxes, sales taxes, corporate taxes and taxes on the transfer of wealth and assets such as the capital gains tax, estate tax, and gift tax.
Income tax is the tax that individuals pay the government on the income and wages that they earn every year. These taxes are taken out on a monthly or biweekly basis from an individual’s paycheck in the form of payroll taxes. At the end of the year, these payroll taxes are reconciled with an individual’s overall income, as well as applicable deductions and tax credits, through the filing of an income tax return. Income and payroll taxes are paid to the federal government, but may also be due at the state and local level as well. While most individuals pay taxes through the normal federal income tax structure, certain individuals may find that they are subject to the alternative minimum tax.
In addition to individuals, many corporations are also required to pay income taxes on the profit that they receive. This is paid in the form of a corporate tax for most traditional corporations. Certain corporate structures, such as the S corporation, allow profits to “pass through” the corporation and avoid corporate taxation; these entities are taxed through the owners who include the corporate taxes when they file their personal tax returns.
Taxes on the Transfer of Wealth
Whenever money or assets are transferred from one individual to another, the federal government and state governments may be entitled to a portion of that transfer. This can happen when the asset is transferred as a gift while an individual is still alive, and thus subject to the gift tax, or when the asset is transferred after death and subject to the estate tax. Finally, when certain assets are sold for a profit, such as stocks or a home, individuals must also pay capital gains tax on the appreciation they receive on these items.
Taxes on Goods and Services
Finally, both state and federal governments impose taxes on the sale and ownership of certain products such as goods and property. Many of these taxes are common throughout our society and a part of our daily lives. For instance, when we purchase items in a store, we typically pay a sales tax that is used to support local governments and fund public initiatives. Sometimes, included within the price of that good is an additional excise tax, which is a tax imposed on only certain categories of goods, such as cigarettes. Local governments also receive a great deal of funding from property taxes, which are taxes that property owners, as opposed to users, must pay based on the calculated value of their property.
How long should I keep my tax records? You should keep your tax records for six years, or at least three years. The normal time limit for an audit is three years, but the limit can be extended to six years in some cases.