How Taxes Work: What Every Young Adult Should Have Learned

As the old saying goes, only two things in life are inevitable. One is a mysterious abyss that strikes fear in the heart of all mortal men, and the other is death. You might think that something so important as the tax system would be taught in public schools, or taught by our parents, but my experience shows that this is completely untrue. Most of us enter adulthood having no clue how taxes work.

I understand the anxiety. You have to file taxes every year, but nobody seems interested in teaching you even the basic concepts of taxation. We trust a critical, and sometimes expensive, part of our life to “experts” and software without even a fundamental understanding of the black box of numbers and regulations within.

a black box that could be where you file your taxes
Just put your taxes right here.

That’s why I’m here to help. This post is not a “how to file taxes” post (that comes later). It’s a “how do they even determine what I owe?” post. Think of it as a general theory of taxation. I’ll put key terms in bold throughout the post. By the time you reach the end, you might not be able to fill out a Schedule C form for your sole proprietorship, but you’ll know the difference between a tax deduction and a tax credit.

Follow me along the path of determining your tax liability, and you’ll learn what you should have been taught in school about a topic that actually matters in your life.

Disclaimer: this is not tax advice, and I am not a certified tax professional. I’m speaking as a young adult who has filed taxes and helped others file theirs.

Step 1: Earning Money

This is probably the hardest step for most of us. Earning money is tough. However, it’s no use learning how taxes work if you don’t have an income with which to pay taxes. We start with a number: how much money did you actually earn for your work? For our purposes, let’s assume your household (you and your spouse) made $50,000 last year combined. This number is your gross income.

Step 2: Exemptions

Right off the top, the IRS allows us to claim exemptions. Exemptions mean that we can claim “this money can’t be taxed because I am breathing air.” There’s a limit, of course. You can’t just claim infinity plus one exemptions and the IRS owes you a Coke. You typically get one for yourself, one for a spouse, and one for each dependent in your household. This year, each exemption is worth $4,000.

In our example, my $50,000 of taxable money becomes $38,000 because I have a wife and a dependent son (three exemptions means I protect $12,000). This is a pretty sweet deal, and it’s designed to ensure that the poorest of the poor are protected from being taxed on necessary income.

Step 3: Deductions

In addition to the personal exemption, the IRS allows a laundry list of tax deductions. In a nutshell, you can do certain things with your money to prevent it from being taxed. The IRS says “if you spend a dollar doing these things, we will not tax that dollar.” Take note that a deduction and a tax credit are two different things.

Since the list of deductions is mind-numbingly long and requires pretty extensive documentation, the IRS generously allows for a standard deduction to simplify the process. If you’re a young adult who isn’t wealthy, you’re probably going to want to take the standard deduction as opposed to itemizing deductions. Itemizing requires listing each deduction separately with verification, and unless you’re giving $1,000 a month to charity or own a home, you probably won’t reach the threshold where your itemized deductions are larger than the standard deduction ($6,300 a year for singles and $12,600 for married couples).

In our example, let’s take the standard deduction for our married couple and be done with it. My $38,000 of taxable money is now $25,400. This is what the IRS calls your taxable income, or the amount of income actually subject to taxation. It might be interesting to note that a typical middle class family is only actually paying taxes on roughly half of what they make in a year.

Step 4: Tax Rates

OK, so this is probably the hardest step to understand. It’s also easily one of the most misunderstood concepts in government. Let me break it down.

How people think taxes work

For every dollar you earn, the government takes 35%. Simple enough, right? That’s SO MUCH TAX!

License plate saying taxes are too high
This guy knows what I’m talking about!

If this were true, then in my $50,000 example (which puts me in the 15% marginal tax bracket), I would owe the IRS $3,810.

How taxes work in reality

If you earn a little bit, the IRS takes a little bit. After you reach a certain threshold, the IRS takes a higher percentage of every additional dollar above that threshold.

In our example, I have $25,400 in taxable income. The first $18,451 is taxed at 10% (the IRS needs $1,845 of that income). For the next $6,949 they take 15% (they need $1,042 of that income). My total gross tax, or the amount the IRS needs from me, is $2,887.

Chart showing how marginal taxes work
Here’s the same information as a pretty picture.

Not to belabor the point, but people often fundamentally misunderstand tax brackets. They’re called marginal tax rates because that tax rate only applies to the “marginal” (meaning first additional) dollar above the previous tax bracket threshold. Billionaires do not pay 39.6% on everything they earn. They only pay that rate for every dollar above around $460,000 if they’re married.

Step 5: Tax Credits

Remember how deductions work? The IRS says “if you spend a dollar doing these things, we will not tax that dollar.” Tax credits are similar, with a twist. The IRS says “if you do these things, we will consider that as a substitute for paying us taxes.” Essentially, you can pay someone else instead of the IRS.

These are usually really popular programs that target the middle class. Common tax credits include the Child Tax Credit of $1,000 per child just for having children, Child and Dependent Care Credit allowing you to keep money you’ve paid for childcare, and the American Opportunity Tax Credit for college tuition. Every dollar you receive in tax credits reduces your overall tax bill for the year.

In our example, I owe $2,887 after Step 4. I have a child, so I claim the Child Tax Credit and reduce my tax liability to $1,887. In essence, the IRS has forgiven $1,000 of my tax bill. This total is my actual amount of tax owed.

Step 6: Withholdings

After all of these calculations, I’ve figured out how much I owe the IRS this year. No matter how big or small this amount is, it would kind of suck to have to pay it in one lump sum every April. Luckily, very few people do this.

If you work a typical job, you probably have taxes withheld from every paycheck. If I’m paid every two weeks, I might try to withhold $150 from every paycheck to cover my tax owed. This is where refunds come in.

Most people pre-pay their taxes through withholdings. When you file your taxes, the key numbers are how much you earned, and how much you withheld. These are found on W-2s or 1099s for most of us. By inputting these amounts on your tax forms, the IRS calculates how much you overpaid or underpaid throughout the year. Most of us overpay our taxes to the tune of around $3,000 per year.

Lots of folks believe that getting a huge refund is a good thing. It’s like a bonus in April! The key point here though is that a refund does not mean you pay less in taxes. It just means you paid them too early. You might find joy in that, but I personally would rather keep my own money throughout the year rather than giving the government a 12-month interest-free loan of a couple grand.

Hopefully you found this to be a thorough tutorial on how taxes work. Look for the next post in this series, where I’ll cover how to actually file taxes.

Did I miss anything? Are any sections unclear or difficult? What other tax topics would be helpful? Let me know in the comments below.

How to Vote in a Presidential Primary

As you probably know, 2016 is a presidential election year. It’s time for us as mature adults to exercise our civic duty (heh heh, duty) and vote in November. But the fun doesn’t start when the leaves change! You should also take the time to vote in your state’s presidential primary election, and that’s just around the corner! I’m sure you agree that presidential primaries are the most important of presidential elections.

Let me repeat, just in case you didn’t hear me.


This fact may come as a surprise to you. It would certainly surprise the 87% of eligible voters who didn’t vote during the 2012 primary season. But it’s true. By the time we reach the general election in November, your options have already dwindled down to two candidates (and it’s fairly likely that at least one of those two will disgust you). Primaries are your opportunity to choose from a virtual buffet of political options.

You have your small state governors, your former Cabinet members, your televangelist preacher wannabes, your heavily-sedated heart surgeons, your Donald Trumps, your brothers of former failed presidents…the options are virtually limitless! This is your chance! Raise your voice and tell the world (privately, behind a curtain, of course) who you think should be handed the reins to run the free world!

Chris Christie at the most recent GOP primary debate.

Chris Christie at the most recent GOP debate

You may scoff, but refusing to vote in the primary is like your parents saying “oh, we don’t care who you date, just don’t go too crazy,” then showing up at your wedding complaining about the bride they’ve never met. You weren’t involved in the important part of the process. Stop whining that you don’t like the end result. Yeah, these are the two brides we picked. You could have spoken up in March, but you blew it. Now where’s the cake?

(Note: some states use a caucus system, but the last time I tried to explain a caucus to young adults, I just gave up and found a dude from Iowa to give the lecture. If you live in a caucus state, just get registered ASAP and ask your local activist what to do.)

What is the Presidential Primary Anyway?

We have a two-party political system in the U.S.A. You can argue that we shouldn’t, but even this amusing video featuring cute animals admits that it’s an inevitable part of the current system.

Presidential primaries are the method used by each of the two major parties to select their candidate for the general election in November.

Since we’re actually a collection of semi-sovereign states, candidates for each party must face off in over 50 different elections. You’d think the states would get their act together and hold their primary elections on the same day to make it easier on everyone, but they don’t. As a result, candidates compete in a gauntlet of elections starting in February and ending sometime in the twenty-third century, I think.

Each election rewards the candidates with “delegates” who vote for that candidate at this gigantic convention in the summer, mostly in proportion to their vote share. The party’s nominee is the candidate who acquires the most delegates. (Disclaimer: I just explained a book’s worth of boring procedural details in two sentences. Almost none of those words are 100% correct, but it’s good enough to grasp the concept.)

In summary, the presidential primary is really important because it’s the closest you can get to directly voting for the president. Election history is filled with candidates who were swept into office by a surprisingly strong showing in early primary states. So…vote. It matters.

For the purposes of this post, you may want to click here and scroll down to the first table. It shows election dates, registration deadlines, election types, and whether the primary is open or closed. Keep it open in another tab for quick reference.

Am I Even Registered to Vote?

First things first. You have to be registered in order to vote. Registering is like stupid easy. It’s so easy that you may have already registered and forgotten about it. I first registered to vote in the hallway between classes in high school. My second registration occurred literally as I was moving a couch upstairs. I worry that my next voter registration form will be filled out in my sleep.

This baby is actually registering herself to vote in a primary
This baby is actually registering herself to vote

If you’re unsure about your registration status, Google “voter lookup (state name)”. You’ll need very basic information about yourself, but most states offer an online lookup tool.

How do I register to vote?

About 20 states offer online voter registration (click the link for the list of states). If you live in a state that doesn’t, your best bet is to Google your county’s election commission (sometimes they’re called the supervisor of elections). The registration process is determined on the state level, so you may find that your state offers registration forms at schools, libraries, or the DMV, but the most consistent location for registering is the county election commission.

When is my primary, and when should I register?

Remember when I said these primaries are actually 50-something different elections on different days? It depends on your state. Luckily for my chances of reaching a wider audience with this blog, about 10 states hold their election on the same day: March 1st. This is often called Super Tuesday. Typically, voter registration ends 30 days before an election.

If you live in a Super Tuesday state (Alabama, Arkansas, Georgia, Massachusetts, Oklahoma, Tennessee, Texas, Vermont, Virginia), your registration deadline is most likely February 1st. Other states will have slightly later deadlines, almost always 30 days before election day.

Do I have to declare a political party when I register?

Sometimes. Some states hold “closed primaries,” which require you to declare a party affiliation no sooner than 30 days before an election. Only declared party members are allowed to vote in those primaries. Other states hold “open primaries” where you ask for either a Democratic or Republican ballot at the polling place. Both methods have advantages and disadvantages, and many state primaries are a hybrid of both methods. For registration purposes, you don’t have to declare on the form unless your state holds closed primaries.

Hopefully I’ve convinced you to ensure your registration and prepare to vote in the presidential primary this year. As we approach November, I’ll share more tips and tricks for being a responsible member of a democratic society.

What was your voter registration experience? Share in the comments below.