Tax
What Are Taxes?
Taxes are mandatory payments made to local, state, and federal governments that help fund things like roads, schools, healthcare, and defense.
Common Types of Taxes
Income Tax: Taken from your paycheck (federal + sometimes state)
Payroll Tax: Funds Social Security & Medicare (split between you and your employer)
Sales Tax: Added to the price of most things you buy
Property Tax: Paid if you own a home
Capital Gains Tax: Paid when you sell investments for a profit
How Income Taxes Work
The U.S. uses a progressive tax system, meaning the more you earn, the higher your tax rate. For most people, taxes are automatically withheld from each paycheck by their employer. Then, each year—typically by April 15—you file a tax return to report your income and determine whether you owe more taxes or are due a refund.
Key Tax Concepts for Young Adults
W-2: Form from your job showing how much you earned and how much was withheld
1099: Form for freelance or contract income (no taxes taken out)
Standard Deduction (2024): $14,600 for single filers — reduces your taxable income
Tax Credits: Directly reduce how much you owe (e.g., education credits)
Tax Deductions: Reduce your taxable income (e.g., student loan interest)
Basic Tax Filing Steps
- Collect your W-2s and any 1099s
- Track any tax-deductible education or work-related expenses
- Use tax software or hire a preparer
- Choose between standard deduction or itemizing
- File federal + state (if required)
- Pay what you owe or get a refund
Smart Tax Tips
- File early to avoid identity theft
- Use free or cheap tax filing tools
- If you're self-employed, set aside money for taxes (30% is a good rule of thumb)
- Contribute to employer-sponsored 401(k) plans to reduce future tax burden
Mistakes to Avoid
- Ignoring side hustle income
- Withholding too little taxes from each paycheck (you could owe at tax time)
- Filing late (penalties can add up fast)
- Not asking for help when you don't understand something
Goal for Young Adults
Learn the basics early, keep good records, and treat tax time as a chance to optimize your money, not fear it. A little tax knowledge now saves a lot later.
