Tax Basics: A Beginners Guide to Taxes

Congress, the legislative branch of the government, writes the Internal Revenue Code (IRC), also called the tax code. The tax code directs the collection of taxes, the enforcement of the federal tax rules, and the issuance of tax refunds, rebates, and credits. The Internal Revenue Service (IRS) is the government agency within the U.S. Department of Treasury that is in charge of carrying out these functions.

Since everyone who makes over a certain amount must pay taxes, it's important to get a general understanding of federal tax laws in the United States. For articles focused on more specific topics, see the index for FindLaw's Tax Law section.

How Is the Tax Code Interpreted?

The IRS interprets tax provisions through IRS regulations, which provide guidance on the application of tax law. Because not every tax code has a regulation, the IRS also uses revenue rulings, revenue procedures, and letter rulings to offer guidance. Although the IRS can offer its own interpretation of the tax code, when there is a dispute, the courts interpret the tax code and decide how Congress intended the tax rules to be applied.

How Does the Government Use Taxes?

The U.S. government collects income taxes and payroll taxes from individuals and corporate income taxes from companies. The government disburses the money, according to the federal budget, to the appropriate agency to use for purposes like national defense, Social Security, education, national parks, and for government services like welfare.

How Does the Government Collect Income Taxes?

The government receives most of its revenue for its budget through income taxes. The collection of income taxes occurs throughout the year by withholding money from a person's paychecks. At the end of the year, every person that earned income must file a tax return to determine whether the government collected enough taxes through withholding or whether the government owes a person a refund for paying too much tax.

What Is Taxable Income?

The IRC defines gross income as "income from whatever source derived." There are two types of income subject to taxation: earned income and unearned income. Earned income includes:

• Salary
• Wages
• Tips
• Commissions
• Bonuses
• Unemployment benefits
• Sick pay
• Some noncash fringe benefits

Taxable unearned income may include:

• Interest
• Dividends
• Profit from the sale of assets
• Business and farm income
• Rental income
• Royalties
• Gambling winnings
• Gifts and inheritance

It is possible to reduce taxable income by contributing to a retirement account like a 401(k) or an IRA.

What Are Allowable Deductions?

The government allows the deduction of some types of expenses from a person's adjusted gross income, or gross income minus adjustments. A person can exclude some income from taxation by using a standard deduction amount based on the taxpayer's filing status or by itemizing certain types of expenses. Allowable itemized expenses can include mortgage interest, state and local taxes, charitable contributions, and medical expenses.

If in Doubt, Get Informed: Contact a Tax Law Attorney

Anyone can make an honest mistake with regard to taxes but the IRS is strict about enforcement. Since everyone's tax situation is a little different, you may have questions that aren't easily answered through a simple online search. Get ahead of the curve and get help from an experienced tax law attorney.