Financial Literacy: Understanding the Basics of Income Tax

Did you know that every paycheck you receive has a portion of funds that have been withheld, which get sent to the government –  that’s income tax! Even though the money off your checks is automatically deducted, you are ultimately responsible for taking control of your tax situation. Most of us didn’t learn the basics of income tax in school, but it’s never too late for a financial education!

What is considered income?

Income is earned money that you worked for, or a return on capital you’ve previously invested. 

Who must pay income taxes?

In short, everyone. All people and organizations are ‘subject to income tax’, which means they have to file a tax return each year. Organizations such as churches and other religious institutions don’t pay income tax, but they are still required by law to file a tax return.

Why do we pay income tax?

The U.S. government relies on individual income taxes to fund the largest category of federal revenue. The income tax we pay accounts for nearly 40% of money collected by the U.S. Treasury.

What is income tax used for?

The government uses tax dollars on items such as: Infrastructure (road improvements and repairs), schools, veterans’ benefits, law enforcement, science (like NASA!) and more.

The income tax rate has changed throughout history

U.S. history has beared witness to the highest ever income tax rate of 94% after WWII and at its lowest, today’s rate, which is barely below 40%. That massive drop has occurred in less than 100 years!

What is a tax benefit?

Contributing money to your retirement savings plan is an example of a tax benefit. The government creates tax benefits to encourage and reward people for making certain financial choices.

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