Tax Liability
Candlefocus EditorIncome taxes are the most common type of tax liability. Employers withhold a portion of an employee’s paycheck and use this money to pay the employee’s income tax liabilities directly to the government. These payments are known as “withholding taxes” and are cited on the employee’s W-2 form. Income tax liability amounts, as well as tax payment due dates, are easy to find on documents like a 1040 form.
Sales taxes are another type of taxation, wherein the government taxes retail sales of certain goods or services at a rate of the purchase price. States, local governments, and even municipalities often impose sales taxes. Many times, businesses include these taxes in the purchase price of the goods, and customers often don’t even realize they are paying this additional tax. However, the transactions are usually tracked and the taxes remitted to the government by the vendor.
Businesses, as well as individuals, also owe capital gains taxes on profits made from investments such as stocks or real estate investments. Capital gains taxes are based on the amount of profit made from the transaction, as well as the holding period for the asset. These taxes are assessed on the profit instead of on the total amount of the transaction.
Taxes are the lifeblood of government, paying for necessary services and obligations, such as Social Security and Medicare expenses. Lowering your tax liabilities can be done by claiming deductions, exemptions, and tax credits. Unfortunately, how much you are able to save by these methods will depend on your individual financial circumstances. Items like charitable donations, retirement account contributions, and college tuition all qualify for certain credits and deductions. Contacting a tax professional or keeping up-to-date with state and federal regulations are the best ways to stay informed of the latest tax laws and how they may affect your financial situation.