Taxes. The word alone can cause eye rolls and groans, even for adults. Before dismissing it as all grown-up mumbo jumbo, though, hear me out! Understanding taxes is like learning a secret code; once cracked it becomes empowering, not terrifying!  Understanding taxes is an important aspect of financial literacy that can often seem daunting for high school students. As you embark on your journey toward financial independence, learning about taxes will empower you to make informed decisions about your money. 

First things first: Why do we pay taxes?

Think about public schools, firefighters, or road repairs: they all benefit our communities, but who pays for them? That's where taxes come in. They're our small individual contributions, funding things like schools, law enforcement, healthcare, and even that park where you hang out with your friends. Taxes are fees imposed by the government on individuals and businesses to fund these public services and projects. As a responsible citizen, paying taxes is not only an obligation but also a way to contribute to the overall well-being of your community.

Types of Taxes

There are various types of taxes, but the most common ones you'll encounter are income, sales, and property taxes.

• Income Taxes: These are taxes on your income from your job, self-employment, or investments. The government calculates how much you pay based on the amount of money you earn, with varying rates applied to varying income amounts. Seeing these taxes taken out of your paycheck can be a shock at first- I mean, you earned that money! Just remember that it goes to pay for a wide range of services that you and other individuals enjoy, including social security, national defense, highways, environmental programs, and so on. Most individuals complete income tax returns annually with details of their income, deductions, and credits. Understanding how to calculate your taxable income and understanding gross income versus net income are foundational elements of financial planning success.

• Sales Taxes: When you make purchases, you often encounter sales taxes. This is a percentage of the item's price added during checkout. Knowing how to calculate the final cost of an item, including sales tax, is essential for budgeting. Certain items, like groceries or prescription medicines, may be exempted or taxed at a reduced rate. Your state may even have tax holidays, where sales tax is waived for a period of time for purchases related to things like education for example- taking advantage of these opportunities can help your budget!

• Property Taxes: If you own real estate, you’ll more than likely be subject to property taxes which contribute to local services and schools. Understanding the assessment process and knowing how to budget for property taxes is important for homeowners. Your property tax bill is determined by both the assessed value of your home and local tax rates, which may differ significantly between areas and can greatly alter the overall tax burden.

I’m in high school, do I have to file taxes?

As a high school student, you may not yet need to file taxes if your part-time income falls within certain parameters; however, learning about the process early on is beneficial. Familiarize yourself with tax forms, deductions, and credits. Many people use tax software or hire professionals to help them navigate the complexities of filing taxes…but don't worry; it's usually pretty simple, especially if your income is below a certain amount. 

How do I know if I need to file a tax return?

The good news is there are resources to help you navigate the tax world. Check with your parents or guardians, teachers, or even online resources like the IRS website. They can help you figure out whether filing is necessary and guide you through the process.

What if I do need to file a tax return? 

First off, don’t panic! Filing taxes doesn't need to be stressful or scary; there are resources such as free online tax filing platforms or apps available which can guide you through each step. After all, everyone started somewhere - even adults need help sometimes!

Okay, I filed my return, now what?

Taxes aren't just about paying in; sometimes, you can get money back! This is called a tax refund. Sometimes, the government might estimate how much tax you owe based on your income, but overestimate. This means they took a bit more than they needed and will give you back the difference. You should also check if you're eligible for any deductions or credits – these are like coupons that can reduce your tax bill or even get you some money back.

The IRS sends me money? You officially have my attention.

Who doesn’t love getting some of your money back? But that’s just the thing, it’s your money and has been the whole time; there are actually some good reasons why aiming for a smaller refund can be smarter in the long run. A tax return just means that you’ve overpaid during the year and the IRS is returning that overpayment to you. Imagine misplacing your wallet with $50 in it and finding it months later. You’re happy to have your cash back, but think about what you could have done with it if you had it all along. Here's why a smaller refund may be better:

• Instead of one fat refund check each year, a more consistent cash flow of slightly higher paychecks makes budgeting and avoiding debt simpler.

• When it comes to tax refunds, think of them as interest-free loans to the government. By making necessary changes in withholdings and filing, that money remains in your pockets and could earn interest through savings or investing.

• Being financially responsible teaches you to live within your means without depending on a large lump sum once every year for unexpected costs or purchases. 

• Withholding the appropriate taxes from the start can help avoid unpleasant surprises when filing taxes next year, including smaller refunds or even unexpected bills for taxes owed. 

Of course, in certain instances, a larger refund might prove useful:

• Are you saving for a large purchase like a car or a home? An increased refund could boost your savings towards these goals.

• If budgeting remains difficult for you, an extra large refund can provide a much-needed safety net. If you know the extra cash each month will likely be spent on unnecessary items, it might benefit you to have those funds kept out of reach for most of the year.

Knowledge of taxes gives you more power over your financial future. Once you understand the fundamentals, you can confidently move toward your financial goals such as saving for college or creating a smart budget. Financial literacy involves making informed and effective decisions with money; understanding taxes plays a pivotal role here - be mindful when budgeting, saving, or investing and consider their tax consequences! Here are a few more things to keep in mind…some tax facts, if you will:

• Make sure you include estimated taxes in your budget to avoid unpleasant surprises during tax season.

• Some investments, like Individual Retirement Accounts (IRAs) or 401(k)s, offer tax advantages. Learning about these options can help you make smart saving decisions.

• Capital gains tax may apply when you sell investments for a profit, so understanding these taxes may have an effect on your investment strategy.

TLDR:

• Taxes are your contribution to the public services that keep a community going.

• You might need to file a tax return, depending on your income.

• Resources are available to help you navigate the process.

• You might even get a tax refund! But think through how minimizing your refund might benefit you.

• Knowledge is power – the more you understand taxes, the better you can manage your money.

Taxes might not be everyone's favorite topic, but by understanding them, you're taking control of your financial future. And who knows, you might even find a little bit of fun in the process (and if you do, a career in financial services may be something to consider!) Stay curious, seek additional resources, and remember that being informed about taxes is an essential part of making sound financial decisions. 

Bonus Tip: Check out the IRS Teen Tax Topic Hub for fun and informative resources on taxes specifically for young people.