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Tax Basics: A Beginners Guide to Taxes

Congress, the legislative branch of the government, writes the Internal Revenue Code (IRC), also called the tax code. The tax code directs the collection of taxes, the enforcement of the tax rules, and the issuance of tax refunds. The Internal Revenue Service (IRS) is the government agency within the U.S. Department of Treasury charged with carrying out these functions.

Tax Basics: How is the Tax Code Interpreted?

The IRS interprets tax provisions through IRS regulations, which provide guidance on the application of tax law. Because not every tax code has a regulation, the IRS also uses revenue rulings, revenue procedures, and letter rulings to offer guidance. Although the IRS can offer its own interpretation of the tax code, when a dispute arises it is the role of the federal court system -- a part of the judicial branch of the government -- to interpret the tax code and to decide how Congress intended its application.

Tax Basics: How Does the Government Use Taxes?

The U.S. government collects income taxes, payroll taxes, sales taxes and real estate taxes from individuals and companies. The government disburses the money, according to its budget, to the appropriate agency to use for purposes like national defense, Social Security, education, national parks, and for government services like welfare.

Tax Basics: How Does the Government Collect Income Taxes?

The government receives most of its revenue for its budget through income taxes. The collection of income taxes occurs throughout the year by withholdings from a person's paychecks. At the end of the year, every person that earned income must file a tax return to determine whether the government collected enough taxes through withholding or whether the government owes a person a refund for paying too much tax.

Tax Basics: What is Taxable Income?

There are two types of income subject to taxation: earned and unearned income. Earned income includes:

  • salary
  • wages
  • tips
  • commissions
  • bonuses
  • unemployment benefits
  • sick pay
  • some noncash fringe benefits

Unearned income subject to tax includes:

  • interest
  • dividends
  • profit from the sale of assets
  • business and farm income
  • rents
  • royalties
  • gambling winnings
  • alimony

It is possible to reduce taxable income by contributing to a retirement account like a 401(k) or an IRA.

Tax Basics: What are Allowed Deductions?

The government allows the deduction of some types of expenses from a person's adjusted gross income, or gross income minus adjustments. A person can exclude some income from taxation by using a standard deduction amount determined by the government and a person's filing status or by itemizing certain types of expenses. Allowable itemized expenses include mortgage interest, state and local taxes, charitable contributions, and medical expenses.

Next Steps
Contact a qualified tax attorney to help you navigate
your federal and/or state tax issues.
(e.g., Chicago, IL or 60611)

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