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What You Need To Know About Taxes

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As the old adage goes, taxes are a fact of life. And the more we know about them as adults the easier our finances become. There are many things to learn to become an expert (this is why we have accountants), but the essentials actually aren't all that taxing. From state taxes to pensions and gas tax, here's what you need to know about taxes.

Tax Brackets and Deductions

There are seven federal tax brackets, varying from filing season to filing season depending on current tax rates. The higher your income, the higher the tax rate you will be expected to pay. Employees on a payroll system can generally expect their employer's HR department to sort this out for them. They will base this on the information on each employee's W-4 form.

If too much of your salary is deducted in taxes, you will be due for a refund later on. Sometimes these refunds can be pretty sizeable, depending on how long you've been paying too much of your salary for—although obviously you will have had to make do with less in the meantime. However, if too little is deducted, you'll probably have to make up the difference as a lump sum later on.

Filing and Hiring a Professional

Filing your tax return on time—that is, by the April deadline—is crucial for avoiding penalties of up to 5% per month. So even if you know you'll be unable to pay your tax bill, you should still file your return on time. Again, if you're an employee on a payroll system, then your employer should do this for you.

Instead of ignoring the filing deadline, you may ask for an extension. And if you're going to have trouble paying, you could ask about a payment plan with the IRS. If you're a self-employed business owner with enough paperwork and deadlines as it is, you might want to think about hiring a professional accountant.

State by State Tax Comparison

Besides federal taxes on income, US citizens are also expected to pay various state taxes—on property, sales, vehicles and yes, income again. At least one or two of these are just as inescapable as any other kind of tax, so don't bother scouring a state tax chart to find out what states have no state tax whatsoever.

That said, a comparison of taxes by state can reveal, if not the best tax states, then at least which ones are better than others in specific areas of taxation. State tax in Florida, for example, does not include any state income tax. The same is true of various other states, including Alaska, Wyoming, South Dakota and Nevada. Of course, you'll still have to pay federal income tax.

Tax on Pensions by State

Similarly, when people reach a certain age, they may want to know what states don't tax pensions. If this sounds like you, you might be interested in comparing taxes by state for retirees. As with income tax, there actually are some pension tax-free states for retirees, while some others may provide credit for a portion. A tax credit is a dollar-for-dollar reduction in your tax bill.

New York is one example of a state offering a total exemption or partial credit for pension tax. Others include Alabama, Colorado, Georgia, Iowa and Wisconsin.

Retirees may also want to consider state estate taxes before choosing to relocate for favorable pension tax rates. While the federal exclusion amount (the size of an estate exempt from federal taxation) was $11,180,000 in 2018, for instance, some states levied taxes on far less. The NY state tax department levies taxes on estates over $2,062,500, for example.

Vehicle Taxes by State

Another important state tax to be aware of is gas tax. This can vary widely from the average, which is why the price of gas can be so different depending on where you are in the country.

A comparison of gas tax by state (in October 2018) reveals some of the most favorable to by Wyoming's (24 cents per gallon), North Dakota, Delaware (both 23 cents per gallon), Louisiana (20 cents per gallon), Arizona and Mississippi (both 19 cents per gallon). Alaska, which charges no income or sales tax, is known for having the lowest gas tax of any US state. As of October 2018, gas tax in Alaska was 15 cents per gallon.