May 25, 2026 · Ethan Sebastian
What are Taxes? Understanding the Basics.
When you first move to the U.S., one of the biggest adjustments you'll face is the American tax system. In this article, you'll learn what taxes are, what they fund, and the main types of taxes you may be required to pay.
What are Taxes?
Taxes are sums of money that individuals and businesses are required to pay to local, state, and federal governments. These governmental bodies then use that money to fund public goods, projects, and services that benefit the overall community — things like roads, schools, emergency services, and social programs.
Types of Taxes
There are many different types of taxes, but the main ones to understand when managing your money are income taxes, payroll taxes, sales taxes, and property taxes.
Income Taxes
Income taxes are local, state, and federal taxes collected based on your annual income — both money you physically earn (like a paycheck) and unearned income (like interest from a savings account). Not every state or local region charges income tax, and even at the federal level, you may not owe income tax if your income is below a certain amount. For 2026, the federal standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly — meaning income up to that amount generally isn't taxed federally.
There are also several ways to reduce the income tax you owe. A tax deduction lowers the amount of your income that can be taxed. For example, if you earn $50,000 and have a $5,000 deduction, only $45,000 is taxed. The percentage you owe on your taxable income depends on your tax bracket, which the IRS publishes each year and ranges from 10% to 37%.
A tax credit also lowers your tax bill, but in a slightly different way. Instead of reducing your taxable income, a tax credit reduces the final amount of tax you owe — dollar for dollar. Tax credits can be claimed for various circumstances, such as caring for children or qualifying for education expenses.
For most employees, income taxes are paid to the government automatically — your employer withholds the right amount from each paycheck and sends it to the IRS. If you're self-employed, you'll need to set aside and pay these taxes yourself, usually quarterly.
Payroll Taxes
Similar to income taxes, payroll taxes are withheld directly from your paycheck. The difference is that payroll taxes fund specific programs — Social Security and Medicare. To make sure the right amount is being withheld from your paycheck, the IRS recommends filling out a W-4 form. It's a good idea to update your W-4 every year, and especially after major life changes like getting married or having a child.
Sales Taxes
Sales tax is a tax on goods and services, set as a percentage of the purchase price. Rates vary by state and even by city. Along with income and property taxes, sales taxes are one of the main ways local and state governments fund public programs.
Property Taxes
Property taxes are amounts paid on property you own — things like real estate (land, homes), vehicles (cars, trucks, motorcycles), boats, and recreational vehicles. Property taxes are primarily used to fund local services like public schools, fire departments, libraries, and parks.
Progressive vs Regressive Taxes
Taxes can also be described as either progressive or regressive. A progressive tax takes a larger percentage from high-income groups than from low-income groups. The idea is that those who earn more have a greater ability to pay. U.S. federal income tax is progressive — a lower-income worker might be taxed at 10%, a middle-income earner at 22%, and a high earner at 35% or more.
A regressive tax, on the other hand, applies the same rate to everyone regardless of income — like sales tax. Even though the percentage is the same, it ends up taking a larger share of a lower earner's income than a higher earner's, because both pay the same dollar amount on the same purchase.
Summary
When first coming to the U.S., understanding how taxes work is one of the most important steps in managing your money. Knowing the different types of taxes, what your tax bracket is, and what local and state taxes apply to you can make a big difference in your financial stability and long-term planning.
Disclaimer: This article is for educational and informational purposes only and does not constitute financial, tax, legal, or investment advice. Tax laws, brackets, and deductions change over time and vary by individual circumstance. Always consult a qualified tax professional, CPA, or licensed advisor before making decisions about your taxes. Novi Opes assumes no liability for any actions taken based on this article.