What Is Tax and What Is It Used For

If you are a United States citizen and you’re making money of any kind, you need to make sure that you fully understand our tax system and that you know what is expected of you in terms of filing tax returns by the right date and paying owed tax. This will help to ensure that you avoid fees, fines and legal action that can be enforced by the IRS (or “Internal Revenue Service”). Here’s everything you need to know on the subject!

Who pays the most tax?

The IRS released that in 2020, $1,609 billion of filed tax came from individual income taxes. So, most tax paid was paid by individuals on their income. In a relatively close second place, $1,301 billion of tax came from payroll taxes. Then we get into the comparatively smaller figures. $212 billion came from corporate income taxes and $289 came from other receipts.

How are taxes spent?

This, of course, all accounts for a whole lot of money. So how does this money get spent? Well, each year, the president of the United States submits a budget that needs to be approved by both the Senate and the House. This budget is split into three categories: mandatory spending, discretionary spending and interest on federal debt. In 2020, mandatory spending accounted for $4,617 billion, discretionary spending accounted for $1,651 billion and $290 billion was spent on interest on federal tax.

Mandatory Spending

Mandatory spending is primarily used on:

  • Social security
  • Medicare
  • Medicaid

It is also often used on welfare programs, which can include child tax credits, food stamps, child nutrition programs, housing assistance, temporary assistance for needy families and earned income tax credit. Mandatory spending is also often attributed to unemployment benefits, student loans and programs to help veterans.

Discretionary Spending

Discretionary spending is often spent on two categories:

The defense budget is split between the Department of Defense, the State Department and Homeland Security. The non-defense budget is then often spent on education, veterans assistance, housing and urban development.

Making Sure You File Your Taxes Correctly

As you can see, the taxes that you pay go to extremely good use. It’s not all too surprising that it’s a legal requirement that you pay the right amount on time each year. Extremely important services rely on it. Of course, filing your taxes correctly can place you under a lot of pressure, as you risk a lot by filing incorrect taxes or failing to file your taxes. At the end of the day, the IRS is a government agency run under the United States Department of the Treasury, and they can take legal action against you if you get things wrong. You can put your mind at ease and make life a lot easier for yourself by using Creative Tax Solutions to ensure that everything is filed correctly and on time.

Of course, there are plenty more things you can learn about taxes and exactly how they’re spent, but these basics should help you to get started when it comes to understanding what tax is, why we pay it and what it’s used on!