In the UK most workers pay is taxed at source, this is known as PAYE or Pay As You Earn.
Businesses and the very rich usually employ accountants to submit their tax forms to Inland Revenue who will then assess how much tax is to be paid.
As I understand it, in the USA tax forms are submitted yearly to the IRS, what I’d like to know is exactly what happens.
Does John/Jane Doe have to include all the receipts for everything s/he has purchased during that tax year in order for a proper assessment to be made by IRS.
I often hear of tax refunds being made, how is this worked out, if you’ve not paid anything in the year how can refunds be calculated?
Also: If I see an item priced at £5 in a UK shop then that is what I pay for it, any tax is included in the marked price. In the US an item priced at $5 will be subject to all manner of add-ons in the way of State/County/Federal taxes so the cost of the $5 item could be much more.
In the US there are several different kinds of taxes. Let’s start with Income, Property, and Sales.
Income Tax is to the federal goverment. Some states and some cities also have income tax. In all cases, The employer withholds a portion of the wages and sends it to the appropriate agency. But this is only an estimate. After the end of the year, the individual must fill out a form showing how much he made, what deductions he is entitled to, the amount of the tax on the resulting “taxable income”, and the difference between that and the actual amount paid via the withholding. Sometimes the estimate was too high so he gets a refund, and sometimes it is too low and he has to pay more.
Property tax is charged only to those who own real estate. It is charge by the municipality, and is a certain percentage of what the land is worth. The idea here is that those who own more land, or more valuable land, get a correspondingly larger benefit from the police and fire departments and other city services.
Sales tax is charged by the state, county, or city. There’s no federal sales tax yet. It is not included in the marked price of the item, because it is not part of the store’s income. The store merely collects it on behalf of the government, and then passes it on to them.
I’m no expert, but I would wager that with minor differences, they are about the same. Taxes are usually taken from your paycheck, and once a year you file a tax form. If you over-payed you get a refund. If you under-payed you mail in a check for the difference.
The main reasons for shelf prices not including tax, IMO, is lowest advertised price.
In some states you must show the taxes on purchases separately. So even if the tax would be included in the price, the receipt must show the price + tax.
Most if not all sales taxes are State, and Local. I don’t believe I’ve ever heard of a Federal sales tax.
More info: The US income tax is basically on the honor system. One does not have to submit reciepts for the various exempt payments, but the gov’t does occasionally audit random taxpayers, and will want to see those receipts at that time.
Like in the UK, our businesses and rich folk also use accountants for this. That’s not required, but it ends up happening because their activities are so varied that the required calculations are so very complicated. Likewise, many ordinary folk use accountants because they are so confused by all the rules. (I suppose that this is becoming less common, with the proliferation of software to help the average taxpayer figure it all out.)
When you get paid, your employer removes estimated tax from your paycheck - this is usually federal income tax, state income tax, social security tax and medicare tax (collectively called FICA). This tax is estimated off your weekly or biweekly income off of tables that adjust for how many dependants you have.
At the end of the year, your employer sends you a statement of the income you had and the taxes you paid. Additionally, you’ll get statements from anyone else from whom you had income (or other economic benefit - like winning a substantial prize like a computer) - interest and dividends, stock sales, etc. You add all these up. You take out your exemptions (for most people, a few thousand dollars per person in your household). Then you remove your deductions - things like mortgage interest, taxes paid to other entities (like your state taxes and property taxes). That lets you look up your taxes on a table. You then take out any tax credits. You compare the tax you should have paid to the tax you pay and either send the IRS a check for the difference, or they send you one.
We make our tax system sound complex - but for most people its really fairly easy. Most people can take a standard deduction and fill out a single page form. We deal with stock sales, options, consulting income, two working adults - and I have less than 40 pieces of paper to deal with to get into my return. The software pings me if we hit AMT and just refigures the taxes (AMT- alternative minimum tax - something we put in a long time ago to make sure rich people didn’t end up with so many loopholes they didn’t pay tax that now hits our middle class under some circumstances.) If you are running a business, it can get a lot more complicated.
In the UK, the vast majority of PAYE workers, which itself is the vast majority of workers, never get anywhere near an accountant or a tax return. The tax is paid by the employer down to the last penny and it’s reasonably rare to have any kind of adjustment.
Tax exemptions are expressed as “tax credits”, like for having kids and stuff, and you normally commence the tax year with all exemptions in place - expressed as a “tax code” which encompasses tax-free income and the rate at which you pay.
If you do have a tax credit applied to your earnings after the commencement of the tax year, this usually merely changes the tax code you’re on - and the accounts department of the company you work for will readjust your weekly/monthly payment for the rest of the period, so that it all adds up to the correct amount by the end of the tax year. You still don’t have to complete a return.
And indeed conventional wisdom says if you ever do complete a tax return due to other earnings, you then get saddled with doing it for the rest of your life, so a lot of people make sure they avoid having to.
You pay taxes on anything that gives you “economic benefit.” Is something you won not giving you economic benefit? If you didn’t tax people based on economic benefit - and only on cash - there would be huge loopholes in the tax system by giving people cars, framing payment as ‘winning,’ and using the barter system.
(There is an exception to this - you do not pay taxes on gifts - including estates. However, the giver of the gift may be subject to gift or estate taxes - and there is a combined limit for gift and estate value).
Yes, but it is different amounts. For example, one might pay 20% of his income to the Federal gov’t, 3% to New york State, and 1% to New York City. (I made up those numbers, and have no idea how close they might be to the real figures for any particular income level.)
Yes, but not the same amount. For example, here in Missouri the state income tax is about one tenth of the Federal income tax.
The rationale is that it is a form of income, whether it’s cash, goods, or services (the latter two being assessed some equivalent cash value).
It does get confusing, and in many cases can be quite burdensome in terms of paperwork. Hence the existence of businesses dedicated to preparing tax forms. On the plus side, my understanding is that the total tax burden is a smaller (often significantly smaller) percentage than that of many European countries.
In the US there are all sorts of things that a person would spend money on, such that the government wants us to spend money on them, and in order to induce us to do that, they consider that money exempt from taxation. That’s a big part of what makes our forms so complicated. And these things are subject to various rules and limits, and those calculations make it all even more complicated still. Examples include: donations to charity, college tuition, certain business expenses, interest paid on one’s home mortgage, and lots more.
Many Americans would like to see the system become simplified, but they are very afraid that if these expenses are not longer exempt, then they’ll end up paying more tax than they do now.
But those taxes also provide health care, which is a separate expense for the US. If you add the costs of private health care to taxes, the US and Europe are a lot closer.
The key point that you’re asking about, chowder, is what’s called the standard deduction. This is a fixed dollar sum that will exceed the itemized deductions available to most (80%, I think) taxpayers, making it unnecessary for most people to take itemized deductions, and essentially saving the IRS from having to do lots and lots of investigating that they otherwise would.
Even if you were to require everyone to itemize, you wouldn’t have to keep receipts for everything you bought. I don’t keep any, in fact, at least not beyond the return period. You only get to deduct certain expenses - work-related costs like travel or work clothes, for example. You can’t deduct, say, your Christmas shopping.
After the standard deduction, your total annual income is calculated by entering information from forms you get every year (W-2s are sent by employers, 1099s by financial institutions, and so on), and exemptions (kids, spouse, dependent parents, and occasionally stuff like education expenses and the like) are factored in, at which point you end up with a number called your taxable income. That number is then compared to the taxes automatically deducted from your pay by your employer, and you either send the IRS a cheque for the difference, or get one from them.
This means that you can, in essence, force the US government to loan you money for a year, interest free, by taking all the exemptions on the W-4 (the form your employer has you fill out so they know how much to deduct) and then taking fewer on your tax return, leaving you owing money every year. Most people don’t, though, because it can be tricky to calculate how much you’ll owe, and it’s much easier for the government to find $5,000 to give you than it is for you to find $5,000 to give to it.
The main reason for shelf prices not including tax is for interstate commerce. Let’s assume you’re Hershey, and you send out a million candy bars a day with the pre-tax price already marked on each. Imagine how much harder your inventory control, packaging and logistics procedures would suddenly get if your prices had to match up with local prices after the inclusion of sales tax.
There are such things as Federal sales taxes, but they’re not called that; they’re called excise taxes, and those are included in the price, since they’re the same everywhere.
Takes me about five minutes. Standard deduction, no wife/kids, no state income tax here. (:p)
IIRC, it’s automatically reported by the financial institution or brokerage.
