Tax is the imposition of compulsory levies on individuals or legal entities by governments in order to raise revenue for government expenditures, control negative externalities and promote economic efficiency. Tax compliance is the process of ensuring that taxpayers pay the right amount of taxes at the correct time and take advantage of any allowances or credits they are entitled to.
Economists distinguish between taxes and other forms of transfer payments, such as fees (for example, admission to public universities or museums), penalties for illegal acts, loans and donations (including tithes and contributions to religious institutions). The latter are not considered taxes because their main objective is not to generate income; they simply offset the cost of providing a service, like paying a fine for littering.
Taxes are generally categorized by how they are collected and who bears their burden: those that are collected at the point of production (e.g. income taxes, corporate and payroll taxes) and those that are embedded into production costs (e.g. sales and value-added taxes). The exact classification of these different types of taxes varies by jurisdiction.
Individuals and businesses can reduce their total tax liability through exemptions, deductions and tax credits. In the case of income taxes, if they have filled out their W-4 correctly and/or made estimated tax payments throughout the year, the amount withheld from their paychecks or collected by their employers should cover their entire tax bill come filing season. However, if they are owed a refund, the more they know about the various components that make up their tax liability, the more they can optimize their deductions and credits to minimize the size of their bill.