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Understanding Your Income Taxes | The First National Bank Blog

March 4th, 2014

When Were Income Taxes Instituted?

The U.S. Federal Income Tax system was created in 1913, in part to help pay for America’s involvement in World War I. It gathered steam when Prohibition banned almost all forms of alcohol and the tax revenues from liquor sales dried up. The lost revenue had to be recovered somehow, and federal income taxes became a fact of life.

The History of the Federal Income Tax

Our current tax system is complex and likely to become more so in the future, but for now, let’s look at the basics.

How Do You Figure?

Step 1: Add up your income, including wages, interest, dividends, and capital gains.

Step 2: Make necessary adjustments such as certain IRA contributions and business expenses.

Step 3: Do the math. Subtract either a standard deduction (the one the government sets) or your total itemized deductions such as state and local taxes, charitable contributions, mortgage interest, and reductions for personal exemptions you claim. The resulting figure is your taxable income.

Step 4: Apply a series of tax rates to certain levels of taxable income. Higher income gets taxed at higher rates.

Step 5: Compare your calculated tax with the taxes withheld from your paychecks, plus any estimated tax payments you made. The difference is what you owe the government or what the government owes you in the form of a refund.

Woman looking at receipt

Keeping receipts and other documentation throughout the year can save you a lot of frustration and money at tax time.

As a rule, you must file your tax return by April 15th. If you can’t meet the deadline, you may be able to get an extension by submitting Form 4868 to the IRS by the original tax due date. Since some believe that filing for an extension leaves you more vulnerable to a tax audit, it’s best to keep your paperwork in order, clear your schedule and file your personal tax return by April 15th.

Need a Form? It Might be Online.

Different people have different tax situations. This article covers only some of the basics and is not intended to provide tax advice. If your situation is complex, or if you feel you need an expert’s help, don’t hesitate to use the services of a professional.

Do you have knowledge to share about income taxes? If so, leave a comment below.