Understanding Taxes | Cash Course | PragerU Kids

Before we start this episode, here's a quick preview of what's coming. Ready to take charge of your finances and master the art of money management? Cash Course is your ultimate guide to financial literacy, from personal budgeting to macroeconomics. Check out more episodes at PragerU.com. Founding father Benjamin Franklin once wrote, in this world, nothing can be said to be certain except death and... No, no. No, no, no. Don't say it. Please don't say it. Please don't say it. Taxes. You said it. Look, taxes are not fun, but they're an unavoidable part of life. From grain in ancient Egypt to dollars in the United States, governments have collected forms of payments throughout history to fund public projects, like roads, sewage systems, and militaries. Tax amounts are often based on what a person earns, buys, and owns. So the more you know, the better prepared you'll be when you earn, when you buy, and when you own. Okay, fine. What kind of taxes do I pay? Well, when you get a job, you'll notice your take-home pay, or net income, is less than what you actually make. That's because a percentage of your money will be withheld from your paycheck to pay for income and payroll taxes. Federal income tax is only paid by the employee to the government, who then pays for things like roads, infrastructure, and the military. It's a progressive tax. This means the rate used to calculate how much you owe increases as your income gets higher. Some states and even cities also take income taxes on top of the federal amount. On the other hand, payroll tax is generally paid by both the employee and employer to the government, which then pays for Social Security benefits and Medicare programs. Payroll tax is 15.3% of your gross income, where each party pays half, or 7.65%. Sales tax is another common tax that you'll pay on most goods and services. In most states, this tax is added on the state and local levels to pay for things like police, transportation, parks, and education. A portion of the sales tax usually goes to the state, to the county, and to the city. Is that why I had to pay $108.25 for this sweet artwork, even though the tax said it was $100? Yep, that extra $8.25 is a sales tax, and in this case, an 8.25% sales tax. But sales tax isn't paid on everything. Rules vary from place to place, but most of the time, medications and basic foods found at grocery stores aren't subject to sales tax. Whoa, whoa, whoa, hold on. I bought this rotisserie chicken, and I had to pay a tax on it. Ah, that's because it's considered a prepared food, whereas if you bought a frozen rotisserie chicken, it would not be taxed. What? It can get complicated, I know, but it's just the start when it comes to taxes. If you someday own a home or some land, you may have to pay property tax. Then, if you made a profit investing, there's a capital gains tax. Own a business? You may have to pay a franchise tax on the net worth of its capital. Really? And buying some soda with that chicken? It might require an excise tax. You kidding me? Oh, and that vacation you're on? There's probably an added travel tax. Oh, come on. Okay, I get it, I get it. Taxes are everywhere. But is there a way to reduce the taxes I pay? Fortunately, there is. When it's time to do your taxes, you can claim things like charitable giving, mortgage interest, and healthcare costs to reduce your taxable income. These are called deductions. On the other hand, credits, like the child credit when you have kids you can claim as dependent, are subtracted from the amount of taxes owed. So, now that you know a bit more about taxes, it's time to take action. One. Once you've got a job, keep a record of all the income you earn. You'll need this information when you file your annual tax return with the Internal Revenue Service, aka the IRS. They're responsible for carrying out the Internal Revenue Code enacted by Congress and collecting federal taxes. Not paying your taxes is called tax evasion, and it's a federal crime. You could end up paying a fine or even face jail time. Two. Know what taxes you are responsible for paying, budget for them, and pay them on time. The deadline is called Tax Day and is usually on April 15th. If you miss this due date, you might have to pay more money. Three. Get involved. All government employees and everything the government does is paid for with your tax dollars. It's your responsibility to know how your money is being spent and make sure it's not being wasted. When taxes go up, make sure you understand why. After all, you'll be paying for it. Contact your representative, school board, or city council members if you feel funds are being mismanaged. Taxes are an unavoidable and frustrating fact of life. But the more you know, the less likely you'll be surprised on Tax Day, Pay Day, or Shopping Day. Watch more at PragerUKids.com. And parents, don't forget to subscribe.