- You want to know what I imagine when I think of taxes?
Pizza.
Your paycheck is a pizza pie,
and just when you sit down to enjoy it,
that is, spend your hard-earned money,
taxes come and...
So, what are taxes even for?
What do people think about taxes?
Do you know where your taxes go?
- I believe so.
- Probably the government, I'd assume.
- Supporting things that a community needs.
- How do you feel about paying your taxes?
- I know nothing about it.
I just look at my paycheck every week,
and I just see like the taxes they deduct from it.
- I heard it’s very complicated.
- It's very complicated, yeah.
- Do you know how to do your taxes?
'Cause I certainly don't.
So, what are taxes, and what are taxes even for?
According to Investopedia,
taxes are "mandatory fees that both individuals
and companies have to pay the government—
whether local, regional, or national."
So, why are we even giving the government taxes?
Well, taxes are the main source of revenue
for most governments.
Among many other uses, this tax revenue is spent
to improve and maintain public infrastructure,
fund public services, emergency services,
and welfare programs.
They cover a lot.
Before I get into how this directly affects you and I,
let's look back to see how taxes began.
The first-recorded modern tax was in the form of
grain in ancient Egypt.
At the time, Egypt didn't have coin money
so grain represented a tangible store of value
that could easily be collected, traded,
and redistributed throughout society.
So how much did the Pharaoh tax his subjects
for living in his kingdom?
20% of all grain harvests.
In ancient Rome, Julius Caesar was the first
to implement a sales tax across the entire empire
of a 1% flat rate.
And when it comes to the U.S., you might recall
that the British government imposed taxes
on their American colonies as a source of revenue
to pay off their debt from many wars worldwide.
And American colonies finally said, "Enough is enough!"
And thus, the American Revolution was born.
Okay, that's a lot of history, but do you get the point?
And how do taxes affect us today?
Hello AJ.
Thank you so much for being here today.
- Sure thing.
- Could you tell me like the purpose behind taxes?
- Taxes are the budget of the government
that you contribute to as a
participating member of society:
'I am going to live in a place.
The streets are gonna get paved.
I'm gonna be kept safe.
I'm gonna be able to get an ambulance to a hospital.'
That's the purpose of taxes, right?
The government gets a pile of money,
and they distribute it to help individuals.
- Okay, very helpful.
What taxes am I even paying?
Like, I know that there's three basic types of taxes.
Am I correct?
- Yeah, typically, you know, most people,
the biggest tax they're gonna pay is income tax, right?
That's gonna be money that they earn.
They're gonna pay a certain amount of tax on that;
that's gonna go into that government budget.
Then there's gonna be sales tax,
which typically funds more local governments,
typically like state governments or even city governments.
And then we have taxes on your assets or things you own.
But those are the three main ones that most people
are concerned with on their tax return.
- How do I figure out how much in taxes I owe?
- Yup. So this is like the big secret of taxes.
We have tax brackets in this country,
which means that, roughly, your first $10,000
of income is taxed at 10%,
and then the next little chunk is taxed at 12%,
and then so on and so forth.
Different portions of your income have been taxed
at different rates,
so at the end of the day, you're not paying
what bracket you're in,
you're paying a percentage of each little chunk.
- So, what is the difference between state and local taxes?
I feel very unfamiliar with it.
- Whatever state is your home base,
that is where you will potentially pay state taxes.
And then if you happen to live
in a locality—
like beautiful New York City—
you may also owe additional city taxes on top of that.
We've got a bunch of other things that
the city needs to have its own budget
to support the people that live here.
- We need a separate budget for the rats.
This is what I've— - Yes, we do need—
yes, exactly.
- Okay, so I'm self-employed.
Maybe not everyone watching this is,
but could you briefly explain how people who are
self-employed pay taxes? - Sure.
When you're self-employed, there are no taxes
being taken out.
It is your responsibility to pay your taxes quarterly.
So we have to be able to estimate
how much money we've made each quarter,
and make a down payment on that tax that we owe
throughout the year.
- Okay, lastly, is it better to get a lot of money
in your tax return, or is it better to get
less money back?
- You get to control how much is withheld.
You've probably maybe heard of this form called W4,
which you can submit to your employer whenever you want.
Maybe you do get a big refund back
and you don't like that—
you need that money to pay your rent or feed your family.
You can actually adjust your withholding
so you get much closer.
You know, typically, I like a little buffer.
I like a refund at the end of the year—
it just feels better.
Getting a surprise tax bill is one of the
worst feelings in the world.
- Wow, okay.
This is a big life hack.
- Yeah, of course.
- I really enjoyed learning that taxes
don't have to be as terrifying or traumatic
as I've made them out to be in my own life.
There are actual benefits, not just to yourself,
but to society as a whole.
If you are employed by a company, there are some parts
of your paycheck that are automatically taken out,
such as social security, unemployment tax,
medicare taxes, etc.
But, you will fill out your W4,
which dictates how much income tax you have taken out.
If you are self-employed, you are responsible
for figuring out how much in taxes you give—
and our expert recommends filing quarterly.
Just remember the most important thing about taxes
is you have to pay them.
How much—let's wait for this motorcycle.
Okay, how much?
Oh my God!
It's going all the way around!