Rob Yeend

Breaking Down Taxes: Here Are the Main Types We Pay in the U.S.

Breaking Down Taxes: Here Are the Main Types We Pay in the U.S.

by | Feb 17, 2020 | Articles, blog, For Individuals, Newsletter Article, Personal

3 minute read
The U.S. tax system is complex, but understanding the different taxes we pay can be a beneficial tool for financial planning. Below is a broad overview of the most common types of taxes we pay in the U.S.

Income Tax

Income taxes, which are levied on personal income, interest income, and revenue from business, affect every working American. They can be charged at the federal, state, and local levels. At the federal level, they’re collected by the IRS, and the amount depends on a variety of determinants, including income and marital status. The U.S. has a progressive tax system consisting of seven tax brackets, and the more you earn, the more taxes you pay, but there are also a variety of tax credits, allowances, and deductions available to taxpayers that can help tip the scales and reduce your taxable income. Federal tax rates are higher than state tax rates, and not all states have imposed a state tax.

Property Tax

Typically enforced to fund local services such as schools, sanitation, and security, property taxes are based on the property’s current market value. Most affect real estate, but other properties, such as cars, are subject to the tax as well. In many cases this tax is deductible, but property taxes on real estate are only deductible if the property is used for general public welfare. Homeowners also commonly qualify for a mortgage interest deduction.

Sales Tax

A sales tax is a tax on goods or services purchased and is typically calculated as a percentage of the price paid. The specific percentage varies by state and sometimes by municipality, with some states charging no sales tax at all and other states imposing a substantial tax. Sales taxes are often considered regressive because those with lower incomes spend a greater chunk of their earnings to pay the tax compared to those with higher incomes.

Excise Tax

This tax is referred to as a “sin tax” because it’s frequently levied on goods that can harm your health, such as cigarettes and beer, in an effort to deter unhealthy behaviors. It’s similar to sales tax except that it targets specific goods and it’s dependent on the quantity of goods sold, not the amount. An excise tax is often combined with sales tax on a single purchase, but an additional sales tax might be charged as well.

Payroll Tax

There are two kinds of payroll taxes—Social Security and Medicare. Both employers and employees pay Social Security and Medicare in this way: employers deduct a percentage of an employee’s wages from their paycheck and the employer matches that amount to reach the required contribution. For Social Security, an employee will have 6.2% of their wages deducted (with the employer matching), and for Medicare, an employee will have 1.45% deducted (with the employer matching) to fund the federal-run programs.

Estate Tax

Also called Inheritance Tax, it refers to the property you leave behind upon your death. It can be charged at the federal and state level. Cash, securities, insurance, real estate, and business interests are all considered part of an estate, and anyone who inherits them will pay a tax, sometimes a hefty one. For individuals, however, only estates exceeding $5.34 million are taxed by the federal government. The highest estate tax rate charged at the federal level is 40%, and states charge lower rates, with some states correlating the tax amount with the relationship between the deceased and the taxpaying inheritor.

Gift Tax

Similar to the estate tax, this is also a tax on transferring wealth, but the federal government charges a lower amount compared to estates. Gifts over $14,000 are taxable, and the recipient of the gift is responsible for paying the tax, which is a maximum of 40% of the gift value. This applies to a cash gift as well as gifts like cars and company shares.

About the Author

Rob is a CPA and has been in public accounting since 1993 after graduating from Ball State University with a Bachelor of Science degree in accounting. Rob became co-owner of the firm in 2003. Rob provides services to many types of industries; including, manufacturing, trucking, construction, service, and retail.

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