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Lesson 2 of 11 16 min

Taxes 101

Income, payroll, and sales taxes — and how filing a return works.

Written by Mateo LermaLast reviewed 5 sourcesEditorial standards

All lessons in Money After High School

Step 1: The lesson

How do taxes work, and how do you file a return?

  • Income tax: on money you earn. Federal, and in many states, state income tax too.
  • Payroll taxes: Social Security and Medicare, taken from each paycheck.
  • Sales tax: added at the register. In Texas, the state rate is 6.25%, and local areas can add up to 2% more, for up to 8.25% total.
  • Property tax: on homes and land — renters usually pay it indirectly through rent.

Federal income tax is progressive: income is taxed in layers called brackets, and each layer has its own rate. Your marginal rate is the rate on your last dollar; your effective rate is your total tax divided by your income.

Myth: "A raise could make me take home less"

Moving into a higher bracket only raises the tax on the dollars in that higher bracket. Your earlier dollars are taxed the same as before. A raise still means more take-home pay.

Each year, your employer sends a W-2 showing what you earned and what was withheld. You use it to file a tax return (Form 1040), usually due around April 15. If too much was withheld, you get a refund; if too little, you owe the difference.

File even if you don't have to

If you earned too little to be required to file, you may still get back federal income tax that was withheld — but only if you file. Free help: the IRS Free File program and Volunteer Income Tax Assistance (VITA) sites. Rules and amounts change yearly; check irs.gov.

Step 2: See it

How brackets work (simplified, made-up brackets)

How brackets work (simplified, made-up brackets)Hypothetical example

Using simplified brackets of 10% on the first $10,000, 12% on income up to $40,000, and 22% above that, $45,000 of taxable income owes $5,700 in total — an effective rate of 12.7%, even though the top marginal rate is 22%. These are not the real IRS brackets.

10% on $0–$10,000
$1,000
12% on $10,000–$40,000
$3,600
22% on $40,000–$45,000
$1,100
Total tax on $45,000effective rate 12.7%
$5,700

Step 3: Real-world example

Aisha's first tax return

Aisha worked part-time last year, and federal income tax was withheld from every paycheck. Her income was low enough that she wasn't required to file.

  • Her W-2 shows the federal income tax withheld all year.
  • She files anyway, for free, with help at a VITA site.
  • Because she owed little or no income tax, most of what was withheld comes back as a refund.

Had she skipped filing, that money would have stayed with the IRS. Filing takes an afternoon; the refund is hers.

Step 4: Knowledge check

Quiz: Taxes 101 (3 questions)

Answer each question, then check your answer to see the explanation. Retake it as many times as you like.

Question 1 of 3

True or falseGetting a raise that moves you into a higher tax bracket can make your total take-home pay go down.

Choose an answer.

Step 5: Summary

Summary: Taxes 101

You'll pay income, payroll, sales, and (indirectly) property taxes. Federal income tax is progressive: higher rates apply only to income in higher brackets. Your W-2 feeds your yearly tax return; refunds and balances due settle the difference. File even when you don't have to — and use free help like IRS Free File and VITA.

Step 6: What you should remember

Key takeaways: Taxes 101

  • Marginal rate = rate on your last dollar. Effective rate = total tax ÷ income.
  • A raise never lowers take-home pay because of brackets.
  • W-2 → tax return (Form 1040), usually due around April 15.
  • Filing can get withheld money back.
  • Rules change yearly — check irs.gov.

Key terms in this lesson

Finished the lesson?

Mark it complete to track your progress.

Sources and further reading

Rules, rates, and official figures in this lesson are based on these sources. People and numbers in examples are hypothetical.

  1. 1.
    Do I need to file a tax return? (opens in a new tab)

    Internal Revenue Service · irs.gov

  2. 2.
    Federal income tax rates and brackets (opens in a new tab)

    Internal Revenue Service · irs.gov

  3. 3.
    E-file: Do your taxes for free (opens in a new tab)

    Internal Revenue Service · irs.gov

  4. 4.
    Understanding Taxes (opens in a new tab)

    Internal Revenue Service · apps.irs.gov

  5. 5.
    Sales and Use Tax (opens in a new tab)

    Texas Comptroller of Public Accounts · comptroller.texas.gov

Last checked September 2026: Filing deadlines and tax rules. Rules and numbers like these can change — check the official source before making a decision.

Cite this lesson

Financial Literacy Club. (2026, September). Taxes 101. https://learnwithflc.org/courses/money-after-high-school/taxes

Spot an error or an out-of-date number? Tell us and we'll fix it. Read our editorial standards.