TAX 101: The Ultimate Guide for Beginners

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Anybody can be confused about taxes, but with the multitude of terms and topics, it’s easy to feel lost. If you’re looking for simple answers to questions on taxes, then this is the guide for you. A firm will earn economic profits whenever?

In “TAX 101,” we’ll cover what these are and how they work: tax deductions, income vs net worth-based exemptions, credits and rates, filing status combinations. We’ll also provide information on whether a matter falls under state or federal jurisdiction; who provides health care coverage; and learn the basics of investing in stocks.

The only thing you need to know to understand all of these topics is a basic understanding of economics and the American tax system. If you have questions that aren’t covered in this guide, there’s no shame in asking them; in fact, the benefits are worth learning more.

If you find a mistake or have an alternative view on any of these topics, please leave a comment or email us at our contact page.

1. General Tax Information

Taxes are the money paid to the government. They can be thought of as a percentage of a person’s income that is given to pay for government services (like national defense and social security).

2. Tax Deductions

These are expenses that reduce the amount of gross income subject to tax. There are two types: standard and itemized deductions. The most common standard deduction is $5,950 for single filers and $11,900 married filing jointly in 2012. The amount you can deduct for Medicare and most earned interest is limited to $250,000 in combined deductions and $200,000 for single filers or $400,000 for joint filers. The amount of your itemized deductions may be increased through the use of debt-related income exclusions.

3. Tax Rates

This is the percentage that is withheld from gross income to pay taxes. The highest rate is 39.6% (as of 2012). The tax brackets change each year as they are indexed by inflation and these changes skew tax rates over time because they depend on how much higher or lower each group’s annual incomes are.

4. Exemptions

Exemptions reduce your income before it is taxed, making it less costly. Each taxpayer can claim exemptions for themselves, their spouse and any dependents. In 2012, a single filer or married person could deduct $3,800 for each exemption claimed on their filing status form.

5. Filing Status Combinations

Filing status combinations are ways to arrive at the amount of taxable income that a person has for the year. The most common combinations include: single, married filing jointly (MFJ), married filing separately (MFS) and head of household (HOH). The first two combinations describe how a person files and the last one, who they live with. For example, a person can file as HOH if they are single but live with their child for over half of the year.

6. Tax Credits

Credits offset what you owe to the government by a certain dollar amount or percentage. There are two types: nonrefundable and refundable credits. Nonrefundable credits reduce your tax burden below zero so that you don’t get a refund from the government. Refundable credits provide an income subsidy to those who don’t have sufficient taxable income to offset their taxes (poverty).

7. Health Care Coverage

This directly affects dependents as they are required to have health insurance or be subject to a fine. There are two types of coverage: private and public. The Affordable Care Act (ACA) requires that most Americans have health insurance or pay a fine. Public health care coverage is provided by Medicaid and Medicare, while private insurance can be purchased on the exchanges established by the ACA.

8. Investment Basics

Investment basics include stocks, bonds and mutual funds (stocks are securities that represent ownership in a company while bonds represent loans). Stocks represent a fraction of ownership in a company while bonds represent an interest-bearing debt owed by an issuing entity to the bond owner. Mutual funds represent a pool of the money from investors.

9. State Versus Federal Jurisdiction

Certain matters are under the jurisdiction of both state and federal governments, but some are only governed by one entity or another. For example, child support is governed by state law while bankruptcy is decided at the federal level. State taxes are based on both income and sales, while income taxes at the federal level exclude sales.

10. Social Security Numbers

Social security numbers are assigned to individuals on a unique basis and are used to keep track of income as well as prevent identity fraud. They contain nine digits in the form of XXX-XX-XXXX. The Xs represent numbers while the last three letters represent your birth state and gender. 


This article has covered many topics related to taxes that may seem confusing initially, but with a little study you can learn how they work and how to use them in your favor to reduce your tax burden and make more money to invest in yourself. Enjoy the article and don’t forget to check out our other articles on taxes and investing.


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