Taxes Explained: What are they and how do they work?

We all generally know what taxes are, money obtained from people and businesses that is used by the government to fund public infrastructure and services, like schools, roads, and healthcare. Yet it remains an incredibly confusing topic to many all over the USA, especially to those that are just getting started with their financial journeys after getting a new job, or just leaving college. Before getting into specifics, you need to know the types of taxes that exist, and what each of them entail. In total, there are generally 4 types of taxes.

The first type of taxes I'll discuss is Sales Tax. This tax is applied when you buy just about anything in your day-to-day life. This includes food, clothing, furniture, etc. Rates on sales tax are set by the state you live in, and generally range from 0%-10% on items you buy. So buying a $20 shirt would cost $21 after a 5% sales tax.

Next up is Payroll Taxes. These contribute towards social security (retirement income for seniors), and medicare. Payroll taxes are taken out of your paycheck automatically. The rate is generally 7.65% of your every paycheck, and the employer also pays another 7.65%.

Following that we have Income Tax. This is the money taxed on income from a job or investment. Both federal and state governments get to charge income tax, which is taken out of your paycheck before you receive it. This means that while your salary may suggest you make a certain amount of money, what you actually make will always be considerably lower. The percentage of money you are taxed on is directly related to how much you make.

Lastly there’s property tax. Property tax is a tax paid on any type of real estate. This means houses, apartments, commercial buildings, land, etc. It is

generally paid 1-2 times a year, and is based on the value of your property. Generally you get taxes 0.1-3% on your property.