What Are Federal Taxes?

what are medicare taxes

Updated for Tax Year 2014

OVERVIEW

The U.S. Constitution authorizes the federal government to collect various types of taxes from you.

The U.S. Constitution authorizes the federal government to collect various types of taxes from you. No one enjoys paying taxes, but without them, the government could not afford to provide you with the benefits and services it offers. Each form of taxation is governed by separate and distinct bodies of law; however, they all generally charge you tax when you either receive or give money or property.

Income tax

The most common form of federal taxation is the income tax. The income tax rules allow the government to collect taxes from any person or business that earns money during the year. The tax rules provide a broad and sweeping definition of taxable income to include any and all property you receive, regardless of whether you earn it at work, through a business or from making good investments. Although this can seem overwhelming, the rules also provide a wide range of credits, deductions and exclusions that reduce the amount of tax you must pay.

Gift tax

Although not as common as the income tax, the federal government does impose a tax when you make certain gifts to another person or entity. Gifts generally cover situations where you do not expect anything in exchange, such as when you give your children birthday gifts. But rest assured the government is not looking to tax those small gifts you make for birthdays, weddings and other special occasions. The tax only applies to large or high-value gifts you make.

Similar to the income tax, the rules governing these transfers allow you to reduce

or eliminate the possibility of paying tax with credits, exclusions and deductions. For example, the annual gift exclusion allows you to make an unlimited number of gifts if the value per recipient is below a certain value. A unified credit is also available to every taxpayer. Essentially, this credit lets you make additional tax-free gifts when you use up an annual exclusion, but you do have to file a gift tax return.

Estate tax

The federal estate tax applies to gifts you make at death, rather than while you are alive. This covers the money and property you leave to your heirs in a will or through some other method. Only the value of your estate that exceeds the exemption amount for the year of your death is subject to taxation. Although there is some overlap between the gift and estate tax, the exemption works in the same way as for gift tax, but has historically been larger than $1 million.

Employment taxes

Revenue that the federal government raises through the imposition of employment taxes provides the necessary funds to operate social welfare programs such as Medicare and Social Security. If you are an employee, you will see these taxes deducted from your paycheck in addition to your federal income tax withholding.

As of 2014, you are responsible for paying 6.2 percent of your first $117,000 of earnings to fund Social Security, and 1.45 percent on all earnings to fund Medicare. Your employer is also responsible for paying an equal amount on your behalf, but this does not come out of your earnings.

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

Source: turbotax.intuit.com

Category: Insurance

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