Welcome to the first installment of our Taxes 101 series! Whether you’re just starting your financial journey or you’ve been filing for years, taxes can feel overwhelming. But don’t worry—understanding the basics is easier than you think. At JCT Tax Solutions, we believe that when you understand how taxes work, you’re better equipped to make smart decisions all year long.
Different Types of Taxes You Might Encounter
When most people think of taxes, they think of income tax—but there are actually several kinds of taxes that affect your finances throughout the year.
- Income Taxes: These are what you report on your tax return. They’re collected at the federal level, and in most states, there’s a state income tax as well. This is the one that individuals have to make sure is filed by April 15th.
- Sales Taxes: Every time you buy something—whether it’s groceries, clothing, or a cup of coffee—you’re likely paying sales tax. In Minnesota, the state sets a base sales tax rate, but counties, cities, and even special districts can add their own local taxes on top of that. That means the final rate can vary quite a bit depending on where you’re shopping.
- Property Taxes: If you own a home or real estate, you’re responsible for paying property taxes, which fund local services like schools, police, and public works. In Minnesota, the first half of property taxes is due on May 15 for most properties, so now is a great time to make sure you’re up to date. If you have a mortgage, quite often you’ll have an escrow account that takes care of this payment – but it’s a good time to double-check and make sure.
- Payroll Taxes: If you’re an employee, a portion of each paycheck goes toward Social Security and Medicare. These are separate from income taxes and show up as FICA taxes on your pay stub.
- Excise and Special Taxes: These are often included in the price of specific goods like gasoline, alcohol, or tobacco. You might not see them directly—but they’re there!
Understanding the different types of taxes can help you plan better, avoid surprises, and even make smarter decisions about where you live or how you spend.
What Is a Tax Return?
Let’s start with the form itself. A tax return is a document you file with the IRS (and possibly your state) each year that reports your income, taxes paid, and other financial details. It helps determine whether you owe more tax—or are due a refund.
Think of it like a yearly “reconciliation” between you and the government.
Common Sources of Taxable Income
Most people are taxed on more than just their paycheck. Here are a few common types of income that need to be reported:
- Wages and salaries from a job
- Tips and bonuses
- Self-employment or freelance income
- Interest or dividends from savings or investments
- Rental income
- Unemployment compensation
- Retirement income (Social Security, pensions, withdrawals from retirement accounts)
Not all income is treated equally, but most of it has to be reported on your return—even if taxes weren’t withheld. This is where we get into the question of “Is it income?” – this is an important distinction, because income is taxed – not money you received. If you bought concert tickets for you and your friends, when your friends reimburse you for the ticket – that’s not income. But if you buy the ticket and sell it on the secondary ticket market and make money from it, the profit you earn from that is income.
How Withholding Works
If you’re an employee, your employer likely withholds federal (and possibly state) income tax from each paycheck. That money goes to the IRS on your behalf throughout the year. At tax time, your return calculates what you actually owe. If you overpaid, you get a refund. If you underpaid, you may owe the difference.
Withholding is important because the US Tax Code operates on a “pay-as-you-go” basis. It’s expected that you will make income tax payments throughout the year as you earn money, not in a lump sum at the end of the year. If you have a job where you receive regular paychecks, this isn’t usually a problem. If you own a business (including side hustles!), this is where estimated payments can become important. If you don’t make payments throughout the year, you may find a penalty when you file your tax return.
Of course there are exceptions to almost every rule – if you don’t earn income equally throughout the year, you aren’t expected to send in your tax payments equally throughout the year. For example, if you own a business that sells fireworks – you probably do a lot of business in June and early July – but not selling so much in December. When the first quarter estimated taxes are due on April 15th, you may not have any income. By the time the 3rd estimated tax payment is due in September, you might have earned all the money you will for the year. As long as you’re making payments in line with the cadence you receive your income, you’ll be okay (although you may need to do an extra form with the IRS to explain that).
Key Tax Terms to Know
- Adjusted Gross Income (AGI): Your total income minus certain adjustments (like student loan interest or retirement contributions).
- Taxable Income: What’s left after deductions—it’s the amount that actually gets taxed.
- Deductions: These reduce your taxable income (examples: standard deduction, mortgage interest, charitable contributions).
- Credits: These reduce your tax bill dollar-for-dollar (examples: Child Tax Credit, Earned Income Tax Credit).
- Filing Status: This determines your tax rates and deduction amounts—common options are Single, Married Filing Jointly, and Head of Household.
We’ll break down a lot more of this information over the summer as we continue building out this educational series!
Who Has to File a Tax Return?
Not everyone has to file—but many people who technically don’t should, especially if they qualify for refundable credits or could get a refund of taxes withheld.
We’ll break this down in detail in our next post: “Do You Really Have to File a Tax Return?”
Why It Matters to Know the Basics
Understanding how taxes work helps you:
- Avoid mistakes that delay your refund or trigger IRS notices
- Make better decisions about withholdings and deductions
- Plan smarter for future goals like homebuying, retirement, or starting a business
You don’t have to be an expert—that’s what we’re here for! But a solid understanding of the tax basics can make a big difference in your financial life.
Get Ahead with JCT Tax Solutions
Whether you’re filing your first return or ready to level up your tax planning, we’re here to help. Stay tuned for more helpful posts in our Taxes 101 series—and if you’re not sure where to start, just reach out. We’d love to help make taxes easier for you.
