Paying Taxes

Uncle Sam wants his share of your paycheck; but don't give him too much.

When the Sixteenth Amendment to the Constitution took effect in 1913, the federal income tax became a fact of life. Every year of your working life you will go through the ritual of filing a federal tax return, the form(s) on which you calculate how much tax you owe. So why not decide to get organized from the start? By following a few simple guidelines, you can save time, effort, and maybe some money.

The American Tax System

Perhaps the three most dreaded letters in American English are “IRS.” They stand for the “Internal Revenue Service.”

The IRS The IRS, an agency within the Treasury Department, interprets and applies federal income tax laws passed by Congress. The agency generates tax forms and collects taxes.

The IRS will also come after you if you don't pay what you owe. In the past, the agency's aggressive pursuit of delinquent taxpayers and the surly attitude of some of its agents earned it a bad reputation. But public pressure for reform finally brought about changes in the late 1990s intended to make the IRS more helpful to citizens—most of whom are honest taxpayers.

Understanding the Tax System The current federal tax system includes a progressive tax, one in which people with the highest incomes have the highest tax rates. The system includes hundreds of tax breaks for people with special financial burdens, such as people paying for college or starting a business, or who have high medical bills. By finding out which tax deductions you qualify for and taking advantage of them, you can save hundreds of dollars a year in taxes.

People in many places have three bites taken out of their income: federal, state, and local taxes. Therefore, it is especially important to understand how to prepare for tax time.

Withholding

The federal government used to collect taxes at the end of every year. The problems were that (a) the government needed money throughout the year, not just at the end, and (b) many people weren't very good about setting aside some tax money out of every paycheck, so by tax time, they had no money to give to the tax collector.

In 1943, in need of money to finance World War II, the government introduced on a permanent basis the idea of withholding, that is, taking a certain percentage of your earnings before you get your paycheck. The amount that is withheld is shown on the payroll withholding statement attached to your paycheck. The money withheld goes into the federal Treasury. At the end of the year, you figure out the amount of tax you owe.

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