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What Is Tax Law?

Posted by Cailey Taylor on Dec 3, 2018 8:30:00 AM

There’s two guarantees in life; death and taxes. Taxes help pay for schools, your roads, your police and fire department and other things you use every day. Depending on where you live, you can pay income tax, sales tax, property tax, capital gains tax, inheritance tax or even estate tax. Every year millions of taxpayers file their federal tax return and pay their taxes. But for thousands of others, they either don’t file their federal tax return, or they don’t pay the taxes they owe. This can be for several reasons, either they don’t have the money to pay, they forget, or they don’t know how to file their tax return. Not filing your tax return and not paying the federal taxes you owe, can create a large tax debt and make you put into collections with the IRS. This can lead to IRS garnishments such as a bank account levy, a wage garnishment, Social Security garnishment or lien. Here’s what you need to know about tax law and how it affects you.

Tax Laws

Tax laws are the rules and procedures that govern how federal, state and local governments calculate the taxes you owe. Tax law can cover income tax, corporate tax, excise tax, luxury tax, estate tax and property taxes. Congress and your state’s legislature are the ones who are responsible for creating most of the tax laws you see in effect today. Congress and legislatures can change these laws each year through passing new tax laws or enacting tax reform as they did with the Tax Cuts and Jobs Act of 2017. Now the average citizen does not need to know every tax law that is currently enacted, that’s why you hire a tax preparation service or a tax attorney near you. You can also get help by looking at IRS tax forms that are available to you. Most federal tax forms come with instructions that are updated for each tax year.

The basis of federal tax law in the U.S. is the Internal Revenue Code. The Internal Revenue Code covers the different types of federal taxes that include estate tax, income tax, gift tax, excise tax among others. The code is the ultimate authority of federal taxes and every IRS tax form and instruction form are based on that code. The tax code directs the collection of taxes, the enforcement of the tax rules, and the issuance of federal tax refunds, rebates and tax credits. Now federal tax law is more than just the Internal Revenue Code. The Department of Treasury can issue regulations that interpret each code section with longer explanations and examples. These regulations do have substantial authority and the IRS must enforce the tax law in accordance with these regulations. These tax regulations usually take a tax law that is very general or has a short explanation and will elaborate on what that tax law means, how it can be applied and the scenarios you can apply that tax law to.

When it comes to state and local tax laws, it’s important to remember that each state differs in which taxes it enforces and how much you pay in those taxes. For example, currently seven states do not have an income tax. Now while Tennessee has virtually no state income tax, it does have a ‘hall tax” that taxes interest and dividends and it has the highest sales tax in the country. Another important thing to remember is tax laws can be created at the city and the county level as well. For instance, you can pay your federal income tax, your state income tax and a city income tax too. This could be important when looking at where you want to live.

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Different Types of Taxes You Pay

  • Income tax: can cover earned income and unearned income. The federal income tax is the federal government collecting on your income, you can also face an income tax from your state and local government. Some states do not have an income tax.
  • Sales Tax: it will vary from state to state, but typically when you buy an item, you will be charged a sales tax. The items that are subjected to sales tax and the sales tax percentages will vary depending on the state you are in. There are some states with no sales tax.
  • Property Tax: If you own property, you will most likely be charged a property tax. You are charged property taxes based on the assessed value of your property. Your property tax rate will vary based on the city, town, or county you are in. The tax authority will assess your property itself and it may not reflect the market value of your property. Property taxes help pay for public schools, community colleges and local government matters.
  • Estate Tax & Gift Tax: Your estate is the property you leave behind when you die. Estate tax and gift tax comes in if you leave behind more property than the standard limit or if you want to give the property away while you are alive. Doing either of these will leave your heirs to pay heavy taxes on the items you receive. This tax can sometimes be as much as 50% or more in order for them to receive your property.
  • Hotel Tax: Almost every hotel will charge a tax on top of the regular room rate. They can also charge a luxury tax, an occupancy tax and a city tax. This can sometimes amount to as much as 25% of the total bill.
  • Sin Tax: Buying items like cigarettes and alcohol means you’re going to get taxed at a higher rate than if you bought water or fruit. Items like cigarettes and alcohol are subjected to a higher tax. The higher tax is meant to discourage you from consuming products like it.
  • Excise tax: An excise tax is a tax on a specific good such as gasoline. Excise taxes are often included in the price of the product.
  • Capital Gains Tax: Capital gain taxes are taxes on investment income after an investment is sold and a capital gain is made. You will only pay this tax if you invest your money.
  • Payroll Taxes: Payroll taxes cover your contribution to Medicare, to Social Security retirement, disability benefits and to federal unemployment benefits. These will come right out of your paycheck.


What is Taxable Income

When it comes to income tax, there are two different types of income that are subject to taxation. You have earned income and unearned income. Earned income includes salaries, wages, tips, commission, bonuses, unemployment benefits, sick pay, and some noncash fringe benefits. Taxable unearned income includes interest, dividends, profit from the sales of assets, business and farm income, rents, royalties, gambling winnings and alimony.

What if I Owe Taxes?

When you file your federal tax return each year, you will either get a refund or you will owe taxes for that year. If you are due a federal tax refund, you receive that either via mail or direct deposit. If you owe taxes, you must pay those by the April tax return deadline or you can face penalties and interest. If you owe taxes year after year, you may look at your tax withholding's and see if you should be making estimated tax payments. If you can’t pay your taxes by the tax return deadline, you need to look at the different options available to you.  You can either set up an installment agreement that allows you to pay the taxes you owe over a set time, or you may look into filing an Offer in Compromise that will settle the tax debt for less than you owe.

If you owe taxes to the IRS and did not pay by the deadline, you will receive a tax bill from the IRS. If you can pay the full bill, pay it as soon as you can so you can avoid any penalties, fines or interest on that amount. If you can’t pay the full amount of the bill, there are some options you should take so you don’t end up having collection action brought against you by the IRS. You can try filing an offer in compromise or setting up an installment agreement to try and settle your tax debt. If you’re not sure how to do these, you should find a tax attorney near you that can help you resolve your tax debt. The IRS currently charges a late penalty of .5 percent for every month a tax bill is not paid. On top of that, the IRS charges interest on back taxes, penalties and interest of 3 percent a year, compounded daily.

If you have tax questions or need a tax pro to help you, Polston Tax can help! Our office has tax attorneys and tax consultations that can answer all your tax questions. If you owe taxes, need help filing your tax return, or just tax help in general, Polston Tax can help. Call us today at 844-841-9857 or click below to schedule your free consultation.

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