January through April is commonly known as “tax time,” the period most individuals are busy filing their required annual accounting of taxes paid the previous year. Since paying taxes is an important financial reality of life, SCE FCU’s nonprofit organization, the Center for Financial Empowerment, uses this time of year to educate high school students about what taxes are, how they’re used and how they impact one’s personal finances.
We’ve included an excerpt from our lesson plans below, explaining some tax basics. You can help a young person increase their knowledge about taxes by having a conversation about the following information.
How do you benefit from the taxes you pay?
The answer is based in the principle you’re better off being a member of a community than by yourself. A community is a group of people with common interests and concern for the common good. Taxes provide the means for a community to fund the creation of roads, public schools, libraries, police and fire departments, military for national security, public benefit programs, recreation – such as parks and trails – and much more. Without taxes it would be difficult for you to individually produce or purchase many of the benefits that come to you as a member of the community.
Taxes are charged in a variety of ways. Types of taxes include:
|Income tax||Tax on earned and unearned income. Earned income is money earned by working for pay, such as wages and salaries from employment. Unearned income is received from sources other than employment, such as interest earned from a savings account or investment. The federal government charges income tax, as well as some state governments, and also some local county and city governments. Income taxes fund many different programs and operations of federal, state and local governments.|
|Payroll tax||A tax on earned income that supports both the Social Security and Medicare federal insurance programs, sometimes referred to as FICA (Federal Insurance Contributions Act). Payroll taxes are usually automatically deducted from your paycheck, but if you’re self-employed you’ll have to send payments for these taxes on your own. Payroll taxes only fund Social Security and Medicare.|
|Property tax||Tax on land, buildings (including homes and businesses), and motor vehicles (autos, boats, recreational vehicles, etc.). Most property taxes are paid annually. Property taxes are charged by state and/or local governments to fund local schools and other expenses, so the amount varies by location.|
|Sales tax||A tax on purchased goods and services. Taxable goods and services vary by state, and even by city and county. Sales tax is typically a percentage of your total purchase and is added to the original price of an item. For example, if you want to purchase a $1 item in an area that has a 9% sales tax, you’ll pay $1.09 for that item. The 9¢ sales tax charge is added to the item at purchase, and the store owner passes the collected tax to the government.|
|Excise tax||Taxes are collected from the seller/retailer and “hidden” in the price of a product or service, rather than listed separately. Some examples of items include excise taxes are gasoline, hotel rooms, alcohol, cigarettes and airline tickets.|
Taxes are created by representative bodies such as city councils, county commissioners, state legislatures and members of Congress. Voters elect the representatives in these public positions. Therefore, individually you don’t have a lot of control over taxes, but voting group taxpayers are able to influence the tax policies set by elected public representatives.
Understanding taxes is an important part of money management. Taxes play a role in both earning and spending money. Understanding taxes will help teens better understand how to budget, and how to vote.
Help us empower the next generation for financial success!
The Center for Financial Empowerment is a 501c3 nonprofit organization whose mission is to empower disadvantaged youth through financial literacy education. Find out more about our work at Center4FE.org.
Basic Elements - Legal Text
References: The Basics of Taxes, Take Charge Today, August 2013