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Module 2 of 11 16 min

Taxes 101

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

Course lessons

Step 1

The lesson

  • 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.

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.

Step 2

See it

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

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

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

  • 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.

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